Von Mises Institute Part IV

The final presentation, “Rothbard’s Economics of Taxation: Where the Mainstream Went Wrong” was a lecture by Mr. DiLorenzo about the common justifications for taxation. He started by paraphrasing John C. Calhoun’s idea that taxes create two classes of people/institutions. The first is the “tax payer” who funds government programs and the second is the “tax eater” who benefits as a result of the redistribution of wealth. Calhoun echoed Franklin's sentiment on my first post claiming that taxation would inevitably lead to class warfare and the end of our Republic. Calhoun also disparaged what he referred to as “naïve defenders of the Constitution”. Calhoun said that people who just trusted the government to adhere to the letter of the law would be very disappointed. Any statist can use demagoguery to encite the voting majority and find a way around restrictions. I say that totalitarians can only exist as parasites. The totalitarian parasite, be it a democratically elected totalitarian like Hitler or a despot like Hussein, depends on the revenue it drains out of its populace. What would a tax revolt do to a despotic regime? Speaking of demagoguery, Mr. DiLorenzo took the opportunity to levy an insult against President Bush. I do not support the President, but I found his remark inappropriate and, to use his term a "low" blow.
Moving on, he showed how Rothbard’s work debunked some economic theories used to justify taxation such as the idea of “public goods” or externalities. The main reason used to tax people to pay for "public goods" or externalities is because we want to eliminate problems like moral hazard or free riders. He asked if the minor problems of moral hazard or free riding exceed the problems that our tax and spend policies have created like the looming Social Security and Medicare shortfalls and our national debt. Using taxation to "solve" these problems has only created even larger problems for us to deal with. When discussing the definition of public goods he asked what is meant by “volunteerism”. Each of us may be tempted (under a free system) to leave the costs of public goods to our neighbors. In other words, we are content to let someone else pay for the costs of clean air, trash removal, and other so-called public goods. Thus, the community argues that taxation should be forced upon all of its members to ensure that we each pay our "fair share" for the benefits we receive. Statists argue that this is voluntary since the “community” came to this decision. However, Rothbard argued, if the effort is voluntary, how come there are police and courts used to punish people who do not participate? In addition, Statists hide behind the idea of democracy to justify their actions. Of course, people can change policy by electing different representatives the next election. However, then all we end up with are large interest groups fighting it out to avoid being the "tax payers" in hopes of becoming "tax eaters". Readers of my blog know that my position (based on personal experience) on democracy can be summed up in two words: mob rule. Just because I choose to participate in the democratic process does not mean I have “volunteered” to participate in whatever program the community deems in its own best interest. DiLorenzo provided the example of a sailor who has been conscripted to serve in the navy to benefit his community (a national draft - either for volunteer (Kerry's plan) or military service). His service is not made voluntary just because he does not jump off the ship and commit suicide. His mere presence on the ship everyday does not mean he gave his consent to be there. Such is the case with “community decisions”. Rothbard claims that the only a unanimous decision creates real volunteerism. Furthermore, Rothbard claims that a true majority rarely exists in policy making anymore. Instead what comes out of our capital, state house, or local government are “package deals” (see earlier discussion on the 17th Amendment). Minority representatives trade their votes now in exchange for support on their own issues later (this was made much easier by the direct election of Senators who are now no longer responsible to their state legislatures). The policy that emerges is a combination of things the minority is willing to sacrifice now in order to (hopefully) achieve something else in the future.

Let me summarize the conference quickly. The conference did make me want to learn more about some issues, but I do not feel as if I learned anything new during the presentation. However, I did feel some validation of my previous research. I asked my wife to acquire a copy of the Constitution of the Confederate States of America for me as a Christmas present so I can read some of the “free trade” items that were included. I also had purchased Mr. DiLorenzo’s book about Lincoln and now I am very interested in reading it and will move it up in my pile of things to read. I will finish the Federalist Papers and Cato Letters first. Although my comments may seem overly critical (perhaps due to government tax policy on good reviews), I want to state that I am very glad that I attended the conference and I hope the Von Mises Institute continues to provide free presentations to those who are interested in listening. A tax revolt would be a good thing for this country, but it needs a proper moral and intellectual basis. The elements of the intellectual basis were presented in the conference, but in an unorganized way. The moral arguments were lost in attempting to portray southerners as “free traders” when, in fact, their economy was primarily based on the involuntary servitude of their fellow man.

J. Thyme Matz

Von Mises Conference part III

The third lecture was by Dr. Mark Thornton. The lecture was called “Thank Goodness for FDR’s Tax Cut”, which was interesting because I did not think that FDR enacted any tax cuts. He started with four bullets: 1> Taxation is theft. The statistics 45% of American GDP is paid in taxes was mentioned a few times during the conference. 2> “Thornton’s Law” (the author's own economic theory) which states that taxation reduces the amount of real goods and services produced. 3> Taxes produce waste and distortion as resources are diverted from their most efficient use toward government use and 4> he asked the question “is it all worth it”? By this he means: "What is it that government does so well it deserves 45% of our national income? What would not be done if the government did not intervene?" He never did answer these questions. I feel that would have made for a good debate and would have allowed for some audience participation! I noticed he made a slight error in reason in his presentation. He asserted that taxes lead to lower standards of living and higher rates of poverty as people are left with less resources to provide for their daily needs after paying taxes. However, he then asserted that people would be wealthier in the absence of taxation. Here he is incorrect. People would keep the wealth that they earned in the absence of taxation and thus would have a higher standard of living, but NO NEW WEALTH is actually created in the absence of taxation. People earn the same amount of income, they would just be able to keep it all.

FDR’s "tax cut" was really a shift in the way the government received its revenues. In the 1920’s, local and state governments used property taxes as the primary source of revenue. When the depression hit, the proportion of property taxes to income nearly doubled and people became upable to pay their property taxes. The tax revolts that followed were mainly local in nature and community oriented due to the nature of property taxes. The tax revolts were a but different from the type we usually think of. People who could not pay their property taxes had their lands seized to be acutioned off. The auction participants turned out to be locals (or friends of the disposessed person) who bid the price down very low and purchased the property for a nominal fee and then gave it back to the original owners – essentially restoring the land to the owner and wiping out his property tax debt. In addition, prohibition in the 1920’s was partially the result of the income tax being created in 1913. The government could now raise money from the income tax and was no longer dependent on excise taxes on liquor. However, the depression led to a sharp decrease in government revenue through the income tax. FDR suddenly became anti-prohibition (played the game of politics) because a re-instatement of legal alcohol also meant a re-instatement of excise taxes to help fill the treasury. Repeal of prohibition was a “win-win” situation. The repeal led to a new source of revenue for the government and significantly lowered the price of alcohol for consumers (who no longer had to pay black market prices). The “tax cuts” of FDR were not real cuts at all, but were shifts in what was taxed and who paid it. The un-stated warning of this lecture is that tax reform does not necessarily lead to a lowering of taxes across the board. The reform just yields new winners and losers in the redistribution of wealth managed by the government.

Dr. Cantor made the next presentation. Dr. Cantor appeared to be a rare breed. He was a self-professed “non-Marxist” English teacher. I have never before encountered a pro-market, anti-welfare state English professor. While his discourse was a bit long-winded at times, he blended in some humor. His lecture was called “Taxation and Literary History, or Who Killed John Keats”? He cited the many taxes on paper, on windows, and on candles that succeeded in keeping people illiterate and uneducated. After all, how can people read without light or when paper is prohibitively expensive? As these taxes were reduced, the amount of periodicals increased exponentially and illeteracy rates dropped. Of course, taxes still played an important role in what was printed and who was allowed to print. An advertising tax was levied on the amount of advertisements published in a paper. The clever publishers found a way to get around this by inventing the “puff piece” or a quasi-news article that was quite flattering of the subject. “Good reviews” of works of literature were similarly not taxed. The government quickly caught on and started taxing good reviews. Newspapers quickly started publishing their disgust and disdain for recent publications, including those of the late Mr. Keats. The bad reviews quickly filled Keats’ heart with sorrow (as his lungs filled with fluid from the disease he had) and he came to a sudden end. Of course, tax policy did not literally kill Keats, but Mr. Cantor appeared to enjoy presenting the story anyway!

Mr. Fogal, CFP made a quick presentation called “How to Outwit the Tax Police While Supporting Freedom” which highlighted the use of various trusts (including charitable trusts with the Mises Institute listed as the recipient). While informative, I am not sure how many in the audience are actually in the position to use some of that advice.

Lew Rockwell came followed with his presentation called “The Dangers of Tax Reform”. He asked which we thought leads to civilization: taxes or production/trade? Which would lead toward a more friendly relationship between men? Is voluntary trade for mutual benefit more likely to yield friendly relations or will forcing them to give a portion of their wealth to others create strong brotherly bonds?
He said that a Value Added Tax (VAT) or a national sales tax, would have to amount to be between 20-40% of the value of the product to earn the same amount of money as the current income tax system provides. He did not mention the effect this would have on prices or wages. He also did not mention the effect it would have on people living on fixed incomes. Older Americans who live on interest, dividends, and pensions would suddenly find that their savings would be wiped out! They may have budgeted their life savings on current inflation trends and certainly do not expect a 20-40% price increase as a result of a VAT. He also mentioned the danger of the “political elite” offering to phase out the income tax as it implements the new taxes but then conjuring up a national crisis to keep all forms of taxation as permanent. He also warned of the potential for a large portion of economic activity to move underground to avoid paying the taxes. Of course, this would invariably lead to government spies, informants, and police to enforce the taxation and limit the activities of the underground economy. He said it would lead to a war of “government against the people”.
The same argument was levied against social security reform. The “privatization” plans currently being discussed involve what appears to be mandatory savings. Essentially, the savings would be compulsory (just like taxation) and the government would still be in charge of determining how the money is invested and how it would be distributed (someday/somehow). Of course, the partnership between government and Wall Street seems to be a match made in corruption heaven. After all, this plan will be deemed TBTF (financial lingo for Too Big To Fail) and questions about how to insure the “savings” will be raised. He asks, why does the government not trust us to manage our own money? I mean, the reform could simply be a reduction in payroll taxes. Each of us could then decide what to do with our own money. Are we not the best judges of our own situation? Why is the government a better judge of how our money should be used? He concluded stating that any offer to “raise” or create a tax of one type in exchange for a reduction or elimination of another tax (or form of tax) is just too risky. His idea for reform: only lower or eliminate taxes. Good luck with that plan! I am all for it, but I do not see how it is to be done.
Someone in the audience next to me said that his presentation was depressing. The presentation was filled with warnings and dire predictions but offered little hope. Of course we are all interested in lowering or eliminating the burden taxation places on us. I guess some of us were just hoping that the conference would provide us with some tools or offer us different ideas about how to go about doing it.

J. Thyme Matz

VMI Conference Part II

The second lecture was DiLorenzo’s “Lincoln’s Tariff War”. The main tax pointed out in this lecture is the Morrill Tariff of 1861. Please see the link for a good description of the tariff, its historical significance, and some common misconceptions. We should remember, however, that the origins of the conflict lay not just in the election year of 1860 but in its preceding years as well. It is important to note (from that link) the following information:
“The Morrill Bill had been put over to the next session in the Senate, and became an issue supported by the Republicans in the election of 1860. In the new session, after several southern senators had already vacated their seats, the Morrill Tariff was passed 1861 February 28, and was among the last bills signed by President James Buchanan. Historians are not unanimous as to the relative importance which Southern fear and hatred of a high tariff had in causing the secession of the slave states, but there has been a growing tendency to lay more emphasis on it than formerly. Of the declarations of secession, only Georgia's mentions economic issues. South Carolina's address to the other slave-holding states discusses taxes, but expounds at greater length on the South's new minority position, and on slavery.”

What did the Morrill Tariff protect? It protected Northern Manufacturing concerns. Northern industry was not very competitive compared to its European counterparts. In other words, northern businessmen and (more importantly) northern labor earned higher profits and wages than they would have in the absence of a protective tariff. The north did not develop manufacturing because they were better educated, more talented, or had any distinguishing characteristics from their southern brothers. The north had no slaves and thus was labor poor. To compensate for this “disadvantage” they became “capital rich” which led to the development of manufacturing concerns. The south, with its free labor pool, devoted its resources to the development of labor-intensive (capital poor) industries such as agriculture and was dependent on the export of cotton and tobacco. The export-dependent south was disproportionately hurt by the protectionist tariffs. Why was the south hurt disproportionately? The north was able to charge higher than market prices for their products hurting southern consumers and leaving the rest of the world was less able to afford southern goods (not to mention any retaliatory trade practices resulting from US policy). To say that the tariff was the cause of the “War to prevent Southern Secession” is to ignore the reason why the south was disproportionately affected by the tariff, why the south was economically different from the north, and the words of the Southerners themselves. (Georgia, Mississippi, South Carolina, and Texas’ declaration of secession all mention the issue of slavery first!). My notes here are timely as I see that another of the speakers at the conference has a lecture about the economics of the Civil War on the events page of the Mises Institute. Perhaps the Mises Institute is losing its focus.

The rest of the lecture covered the Nullification Crisis. It would have been more interesting if the actual Constitutionality of nullification had been discussed. At least the nullification crisis was a tax revolt and fit within the framework of the conference. Mr. DiLorenzo quoted Jefferson Davis (with some admiration) as calling the North an "exploitive economic system". How he somehow did not manage to mention the hypocrisy of this is something I still puzzle over. After all, how can the Institute claim to promote the "economics of freedom" while giving slavery a free pass? He claims to support the morality of free trade, but I did not once hear him condemn the morality of slavery. Instead he went on an elongated attack on President Lincoln. Lincoln, you see, was not actually the man our public schools texts present. Lincoln played the game of politics. He was attempting to become President of the United States and he was a professional politician. This means he pats people on the back with one hand while stabbing them with a knife held by the other. Lincoln played the game just as Bush, Clinton, and any other professional politician does. So, Lincoln pretended to be for slavery on one hand (demonstrating support for a Constitutional Amendment to keep the federal government out of slave issues and keeping it a state decision) and moving against it at the same time by attempting to keep slavery out of the Western Territories soon to become states.

I think the problem with this lecture was that Mr. DiLorenzo attempted to define the Civil War entirely in terms of a tax revolt led by honest, hard-working southerners against an evil northern regime headed by a statist president. After all, he claimed, the southerners just wanted to trade freely with the rest of the world and the tariffs prevented them from reaping all of the rewards they could earn from free international trade. The fact that the source of their product was slave labor did not seem to concern him at all.

I have one more issue with the conference. The speakers demonstrated a sense of, for lack of better words, “intellectual superiority”. I heard repeated (and perhaps some deserved) slurs against public schools and public education. The speakers attempted to separate themselves (and their enlightened audience) from "average Americans". Perhaps they should examine their audience? Mr. Rockwell also mentioned the "political class" and the "privileged elite" quite often. I can sniff the vitriol of class warfare even without the use of the terms "bourgeois" or "proletariat". I wonder what message he is attempting to convey using those terms or if he thinks any good can come of it. And was he not part of the "political class" during his lifetime? From the looks of his website, he seems to have become the "privileged elite" he denounces.

Part III to come soon!

J. Thyme Matz

Von Mises Institute Conference Part I

I decided to take advantage of a rare opportunity this past weekend. Just a few hours from my house the Von Mises Institute was holding a conference entitled The Trouble with Taxation. Von Mises was an economist belonging to the Austrian School and a student of F.A. Hayek (whose books like “The Road to Serfdom” and “Constitution of Liberty” have greatly influenced me). My research in Hayek led me to Von Mises and I have enjoyed the Institute’s free distribution of copies of his works. He was a brilliant economist who is conveniently overlooked. During my readings of the Von Mises blog I discovered the conference and decided to attend. After all, I would be able to meet people who had studied political philosophy. In addition, I figured that this was a far more convenient method of discovering what sort of people and studies the institute attracts (as opposed to traveling to their headquarters in Auburn to the dismay of my ‘Bama fan brother).

Let me start by saying that, overall, I was disappointed by the presentations of the conference. I can only wonder at what may have been has the original speaker not been forced to miss the conference due to an injured back. The Von Mises Institute replaced him with presentations by Thomas DiLorenzo (author of “The Real Lincoln”), Mark Thornton, Paul Cantor, James W. Fogal, CFP, and Llewellyn Rockwell. I do not know if they were attempting to patronize to a decidedly southern crowd (the conference was located in Charlottesville, Virginia) and perhaps to the Jeffersonians (the conference was sponsored by SEI, Inc. and the Thomas Jefferson Institute and held only a few miles from Monticello) or maybe they have all been heavily influenced by the Institutes home of Alabama. DiLorenzo was a larger-than-life Southern Apologist. He continually referred to the Civil War as the “War to prevent Southern Secession” and one of his lectures was actually titled “Lincoln’s Tariff War”, which I guess is another way for him to avoid using the term "civil war". I will detail my lecture notes and his errors in reasoning in the next post. The audience was a mix of older gentlemen (who seemed to be pro-south/anti-Lincoln and anti-tax but little else) and college students from the University of Virginia or other nearby institutions. The main theme of the conference was tax rebellion. The conference started by reminding us of the fact that the Revolutionary War was a tax rebellion. The next thing they did was to attempt to convince us that the Civil War was also (centrally) a tax rebellion. One of the final lectures warned us of the dangers of the tax reform proposals of the second Bush administration (the text of which has since appeared on Lew Rockwell’s web-page). Let me say that I did not see anyone in the audience who openly supported the government’s current (or past) tax policy. Indeed many were angry (and rightfully so). The biggest disappointment (even above the Southern rhetoric) was the fact that the speakers did not propose a single method of channeling that anger into political action. In fact, Rockwell’s speech was entirely depressing. He painted a grim picture of Bush’s proposal but did not suggest any alternatives other than eliminating the income tax which, based solely on his word and the groups outrage, does not seem a likely solution. To sum up, the speakers were merely “preaching to the choir” and detailed the “Trouble with Taxation” but did little to suggest how we may find a solution to the trouble without living in a fantasy world. If you are interested, the Von Mises Institute has placed some audio/video of the conference on the web.

Mr. DiLorenzo made the first presentation titled “Taxes in American History”. He discussed three major tax revolts in the history of the United States (1776, 1861, & 1913). He described the American Revolution in terms of a revolt against the oppressive taxes of the English Empire. He listed the Molasses Act of 1733, the Navigation Acts, the Sugar Act of 1764, the 1765 Stamp Act, the 1767 Townshend Acts, and the 1773 Tea Act as taxes that led directly to the war for independence. I doubt any serious scholars would deny these facts. In fact, the Constitution of the United States and the Articles of Confederation each had clauses that addressed some of these issues directly (i.e. The Second and Third Amendments are a reaction to the Townshend Acts).
He then discussed the Whisky Rebellion and described it as one of the first challenges to the new Constitutional Federal Government. He lamented that modern texts describe the Rebellion as a victory of the central authority over the tax-dodgers when, in reality, Washington and his troops did not collect any new taxes and only a few members of the rebellion were even tried and none found guilty of any crime. He proudly described how Jefferson and his supporters defeated Hamilton and managed to lower tariffs and other excise taxes and (most importantly) government spending (mainly through cuts in military spending).
The second tax revolution (Mr. DiLorenzo’s apparent favorite) was the War to Prevent Southern Secession. He described how Lincoln (as well as our current President) used war as an excuse to engage in tax reform. Despite the fact that it was unconstitutional at the time (the 16th Amendment was came into being in 1913) Lincoln enacted a tax on income. He also started a tax on inheritance and enacted withholding tax and even resurrected many of the requirements of the Stamp Act. DiLorenzo listed the supporters of the income tax as farmers who were disproportionately hurt by the tariffs on farm tools and farm equipment. The lectures did hammer home the concept that each tax has its winners and losers. Farmers were hurt by the tariffs, which, in turn, benefited domestic manufacturing concerns. The agricultural and export dependent South was hurt by the tariffs that benefited the industrial North. He mentioned he had a lot more to say about the tax revolt that followed Lincoln’s taxes in a subsequent lecture. (He seems to have confused cause and effect here. He claimed that the war was used to justify Lincoln’s new taxes (to pay for war expenses), but at the same time the taxes (high tariffs) were the basis for the South’s reason for the war in the first place).
The revolution in 1913 was not the same as the other tax revolutions. In the previous two revolutions, Mr. DiLorenzo talked about how the tax-payers were rebelling against an unjust system of taxes. The 1913 revolution was a result of the Progressive Movement and led to the 16th and 17th Amendments and the unfortunate end of federalism with the creation of a strong central government and weak state governments. The collection and distribution of income taxes by the central government made states dependent on handouts from Washington DC and the direct election of Senators made them less responsible to their own State Legislatures and gave them more leeway to trade their votes to benefit other districts in return for votes to benefit their own pork projects. In effect, the revolution of 1913 and its income tax led to the destruction of “Civil Society” (volunteerism, charity, and family) and replaced it with the “Welfare Society”. The income tax also made war easier to finance, drained resources that could have been used for savings and investment (meaning slower developments in future productivity and wage growth) and established the concept that the government’s claim to an individual’s productive efforts is primary (the government takes its money out of our income first and hopefully will then grant us enough of the spoils to allow us to survive).

Lecture 2 Notes will be posted shortly.

J. Thyme Matz

Ahead of the curve?

Today I found this article by Walter Williams (a famous economist and professor at George Mason University). I think it touches on some of the themes I have raised in my blog and arrives at some of the same conclusions. The link is from Capitalism Magazine. It is a great blog. Check it out!

J. Thyme Matz

Quote of the day!

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess of the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the results that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. -- Sir Alexander Fraser Tyler

Law vs. The Rule of Law

The term "Rule of Law" has been thrown around a lot these days. I have heard President Bush use it. I heard UN Secretary General Annan use it many times last year. Given the context of their speeches I doubt either of them actually understand the difference between law and rule of law.
The rule of law requires the absolute supremacy of regular laws as opposed to the influence of arbitrary power, and excludes the existence of arbitrariness of perogative, or even the wide discretionary authority on the part of the government according to the classical definition of Mr. Dicey in The Law of the Constitution. What does this mean in practice?
Take, for example, a government of unlimited power (or a powerful regulatory agency). The government or agency can pass whatever law it desires. In other words, the government can make anything legal or illegal on any whim. First off, this makes planning for the future very difficult for its citizens and businesses. Private institutions have no idea what practices they engage in will still be sanctioned legally tomorrow. Private institutions would have to spend billions of dollars to lobby regulatory agencies and governments to keep certain practices legal and to influence the law in a way that is favorable to them and against their competitors. Does this sound at all familiar?
Let me give you a very clear example of the difference between law and the rule of law. Each day your local authorities could convene and pass a law regarding the definition of the colors on the traffic light. Today green means go. Tomorrow it could be yellow, red, or even green again depending on the whim of the authorities. Each day they pass the law and it becomes official legislation. Each day there is a new LAW comes into existence. What happens on the roads? Do people find out about today's new color schemes? What if they do not? The result would be horrible car wrecks at every intersection as people either were uninformed about the law or were just unable to remember the day's particular configurations. In other words, laws would exist but there would be no rule of law.
Another example would be if the government passed a law against murder but then never attempted to find any suspects and bring them to trial and provide justice. The law against murder would be on the books but nobody would be deterred from committing the crime because they would always get off and remain free. The law would exist, but there would be no rule of law. The same situation exists whenever there is a law that is enforced arbitrarily. When there is no way to tell who will be prosecuted nor when, the law loses its overall effectiveness.
Is the USA (and the rest of the world) becoming more ruled by laws and less ruled by rule of law? That should be one question an active mind asks as it views the nightly news and reads the papers.

J. Thyme Matz