Tuesday, April 20, 2010

Of Government and Men:Taxes

Last year I started a series entitled "Of Government and Men". It was my attempt to explain my philosophy on government. I want to periodically update that series, and this is the first "sequel" to that.When writing the series, I didn't spend as much time on taxes as I wanted to. I despise taxes, but I cannot deny that a certain amount of taxes are required. However, as Henry Hazlitt wrote in Economics in One Lesson, "...every dollar of government spending must be raised through a dollar of taxation." The government has no means of raising it's own funds. When it borrows money, that money must be repaid at some point, and can only be repaid by taking the money from the taxpayers. The government does not make a profit. Every dollar the government spends is a dollar taken from someone.

To summarize Hazlitt's argument, the government should carefully examine any tax as the money taken from taxpayers is money the taxpayers can't spend. That's money that isn't used in the private sector to create jobs. Hazlitt used a bridge project to illustrate this:

If {the bridge} is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if ,in short, it is even more necessary to the taxpayers collectively than the things for which they would have individually spent their money if it had not been taken away, there can be no objection. But a bridge built primarily "to provide employment" is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. "Projects" have to be invented. {bold is mine, emphasis in the original}

Any spending of tax money should be done because the need for the items bought by taxes are needed, not because the government wants to "create jobs" or bailout a company. If the need for the bridge, road, building, or dam isn't a real need, the project shouldn't be created.

The other danger in taxes is on what they tax, or what they may cause to happen. Taxes discourage the behavior they tax. A tax on cigarettes will discourage some people from smoking. A tax on investing discourages individuals from investing. In the first case, it makes the object more expensive, in the second case, it decreases the reward of the behavior. When an investor risks $1, he risks losing $1. If his investment is successful, for every $1 he makes, the government will step in and take some percentage of that $1. Let's assume there is a 40% capital gains tax. Then if an investment is a bad investment, the investor loses $1. If it is a good investment he gains $0.60. This level of tax will discourage some people from investing.

As our deficit gets worse and worse, Congress will purpose new taxes to solve the problem. Remember these two rules: Is the spending government purposes worth the money to the taxpayers? And, will the taxes discourage something we want to encourage (like business growth)?

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