Tax Day: Why "Brutus" Thought Taxes Were Brutal

Professor Gary Galles at the Mises Institutes wrote: 

The approach of each year’s April 15 tax deadline reminds us that even if one stretches credulity to believe “taxes are the price we pay for a civilized society,” that doesn’t prove the civilization we get is worth the taxes we are forced to pay. But this issue is far from new. More than two centuries ago, the Antifederalists warned us that the price we would have to pay for government would rise. So as we struggle with our IRS forms, and particularly as we write that check to the Treasury (or file for an extension to delay it), what they said merits recalling.

Antifederalists were particularly concerned that the Constitution gave the national government almost unlimited taxing discretion.

One of the leading Antifederalists was Robert Yates, writing as Brutus. He described federal taxing power as one

that has such latitude, which reaches every person in the community in every conceivable circumstance, and lays hold of every species of property they possess, and which has no bounds set to it, but the discretion of those who exercise it.

In addition,

it will lead to the passing a vast number of laws, which may affect the personal rights of the citizens of the states, expose their property to fines and confiscation. ... It opens the door to the appointment of a swarm of revenue and excise officers to prey upon the honest and industrious part of the community [and] eat up their substance.

Brutus wrote that federal taxation “will introduce such an infinite number of laws and ordinances, fines and penalties, courts and judges, collectors, and excise men, that when a man can number them, he may enumerate the stars of Heaven.” That sounds a lot like what millions of Americans now struggle with each April.

Brutus also predicted how invasive tax collection could become:

This power, exercised without limitation, will introduce itself into every corner of the city, and country — it will wait upon the ladies at their toilet, and will not leave them in any of their domestic concerns; it will accompany them to the ball, the play, and assembly; it will go with them when they visit, and will, on all occasions, sit beside them in their carriages, nor will it desert them even at church; it will enter the house of every gentleman, watch over his cellar, wait upon his cook in the kitchen, follow the servants into parlor, preside over the table, and note down all he eats or drinks; it will accompany him to his bedchamber, and watch him while he sleeps; it will take cognizance of the professional man in his office, or study; it will watch the merchant in the counting-house, or in his store; it will follow the mechanic to his shop, and in his work, and will haunt him in his family, and in his bed; it will be a constant companion of the industrious farmer in all his labor, it will be with him in the house, and in the field, observe the toil of his hands, and the sweat of his brow; it will penetrate into the most obscure cottage; and finally, it will light upon the head of every person in the United States. To all these different classes of people, and in all these circumstances, in which it will attend them, the language in which it will address them will be GIVE! GIVE!

Brutus described the consequences of expansive federal taxing powers. But he was writing only of direct (e.g., excise) taxes and the small federal government they could finance, long before the 16th Amendment made possible a federal income tax in 1913. In its aftermath, Brutus would conclude that he was far, far too optimistic. He would see why Albert Jay Nock described the income tax as a new American revolution, allowing a Brobdingnagian federal government and burdens beyond even his worst nightmare.

Quote of the Day: Taxation Is Not Revenue Raising

Taxation isn’t revenue raising.  It is confiscation of people’s resources.  Revenue is what merchants or employees earn in voluntary trade.  To classify taxes as revenues is an obvious distortion.  It is akin to characterizing the loot from a bank robbery as earnings, profits or income…

Imposing taxes on people is no more asking them for funds than is a tax a form of revenue.  Both of these distortions have to be conscious since they both clearly serve to help to pretend that something voluntary is going on when that is the farthest thing from the truth.

This excerpt is from Philosophy Professor, Cato adjunct scholar and research fellow at the Hoover Institute of Stanford University Tibor R. Machan.

More on US Exodus: Facebook co-founder Gives up US citizenship

Wow. Wealthy Americans giving up on their citizenship seems to be snowballing.

Now we’ve got a high profile case; one of Facebook’s founders has reportedly renounced his citizenship before the company’s IPO.

From Bloomberg,

Eduardo Saverin, the billionaire co- founder of Facebook Inc. (FB), renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill.

Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion. His holdings aren’t listed in Facebook’s regulatory filings.

Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO.

“Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement.

Saverin’s name is on a list of people who chose to renounce citizenship as of April 30, published by the Internal Revenue Service. Saverin renounced his U.S. citizenship “around September” of last year, according to his spokesman.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there.

Exit Tax

Saverin won’t escape all U.S. taxes. Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from their stock holdings, even if they don’t sell the shares, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan’s law school. For tax purposes, the IRS treats the stock as if it has been sold.

Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Avi-Yonah. “Once it’s public you can’t fool around with the value.”

The tax bill from Facebook’s IPO, I believe, could be just one issue seen by the media.

Future taxes and civil liberties, I think, could be of the more important unnoticed concern.

Of course, America’s loss, in the case of Mr Saverin, should likely benefit Singapore, which is another sign of wealth convergence or productive capital moving to Asia and emerging markets. Another wow, the billionaire is only 30 years old (signs of how technology has been reshaping industries).

Unless the political trend towards repressiveness in the US reverses, there will be more cases of exiting wealthy Americans.

And speaking of taxes, globalization and the information age seems to have conspired to create opportunities for technology companies to use legal loopholes to arbitrage away taxes through overseas corporate vehicles.

From the New York Times

The growing digital economy presents a conundrum for lawmakers overseeing corporate taxation: although technology is now one of the nation’s largest and most valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard & Poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& P. companies’. (Cash taxes may include payments for multiple years.)

Even among tech companies, Apple’s rates are low. And while the company has remade industries, ignited economic growth and delighted customers, it has also devised corporate strategies that take advantage of gaps in the tax code, according to former executives who helped create those strategies.

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

So class warfare politicians appear to be increasingly caught in the bind of economic reality. Raise taxes, capital flees.

Quote of the Day: The Politics of Taxation

The fact that the income tax burden is distributed so unevenly produces great politically borne fiscal problems. People who pay little or no income taxes become natural constituents for big-spending politicians. After all, if you pay no income taxes, what do you care if income taxes are raised? Also, you won't be enthusiastic about tax cuts; you'll see them as a threat to your handouts.

That’s from Professor Walter E. Williams

Quote of the Day: The Essence of Tax Day

Investment guru and the maverick Doug Casey talks about the ethics of taxation (emphasis mine)

The first thing is to get a grip on who owns the moral high ground. The state, the media, teachers, pundits, corporations – the entire establishment, really – all emphasize the moral correctness of paying taxes. They call someone who doesn't do so a "tax cheat." As usual, they have things upside down.

Let's start with a definition of "theft," something I hold is immoral and destructive. Theft is to take someone's property against his will, i.e., by force or fraud. There isn't a clause in the definition that says, "unless the king or the state takes the property; then it's no longer theft." You have a right to defend yourself from theft, regardless of who the thief is or why he is stealing.

It's much as if a mugger grabs you on the street. You have no moral obligation to give him your money. On the contrary, you have a moral obligation to deny him that money. Does it matter if the thief says he's going to use it to feed himself? No. Does it matter if he says he's going to feed a starving person he knows? No. Does it matter if he's talked to other people in the neighborhood, and 51% of them think he should rob you to feed the starving guy? No. Does it matter if the thief sets himself up as the government? No. Now of course, this gets us into a discussion of the nature of government as an institution, which we've talked about before.

But my point here is that you can't give the tax authorities the moral high ground. That's important because decent people want to do the morally right thing. This is why sociopaths try to convince people that the wrong thing is the right thing.

If an armed mugger or a gang of muggers wanted my wallet on the street, would I give it to them? Yes, most likely, because I can't stop them from taking it, and I don't want them to kill me. But do they have a right to it? No. And every taxpayer should keep that analogy at the top of his mind.

More..

Taxation is force alloyed with fraud – a nasty combination. It's theft, pure and simple. Most people basically admit this when they call taxation a "necessary evil," somehow mentally evading confrontation with the fact that they are giving sanction to evil. But I question whether there can be such a thing as a "necessary evil." Can anything evil really be necessary? Can anything necessary really be evil?

Entirely apart from that, if people really wanted anything the state uses its taxes for, they would, should, and could pay for it in the marketplace. Services the state now provides would be offered by entrepreneurs making a profit. I understand, and am somewhat sympathetic, to the argument that a "night-watchman" state is acceptable; but since the state always has a monopoly of force, it inevitably grows like a cancer, to the extent that the parasite overwhelms and kills the host. That's where we are today.

I think a spade should be called a spade, theft should be recognized for what it is, and evil should be opposed, regardless of the excuses and justifications given for it. Ends do not justify means – and evil means lead to evil ends, as we see in the bloated, corrupt, dangerous governments we have all over the world.

Read the rest here

Quote of the Day: The Arbitrariness of Taxation

the very existence of taxation – any taxation – opens the door wider to those who wish to use the state to butt further into other people’s business. It’s true that we can marshall theories and arguments about the analytical primacy of the private; the analytical (and in some cases also temporal) primacy of private property; and the analytical (and also sometimes temporal) primacy of social order. That is, we can (in the tradition dating back at least to the Scottish Enlightenment and running up through recent scholars such as Mises, Hayek, Bruno Leoni, Milton Friedman, Vernon Smith, Harold Demsetz, Robert Ellickson, Deirdre McCloskey, Anthony de Jasay, and Bruce Benson) offer evidence and argument that the state is not the prime mover of society and, therefore, that the state does not deserve the widespread modern presumption that bestows upon it an open-ended claim – one bounded only by its own choices – on society’s wealth and resources.

But the fact remains that there is no method of taxation that avoids significant arbitrariness in its application and consequences. (“If X is taxed, why not tax Y, too?!”) It’s this arbitrariness – which is practically inseparable from the fiat that is legislation – that opens the door wider to those who claim, in one breath, not to wish to mind other people’s private business but, in a second breath, insist that much of what looks to non-”Progressives” as private is, alas, really public and, therefore, the business of us all.

That’s from Professor Donald J. Boudreaux.

Video: Why Tax Increases Are Wrong (and Immoral)

Here is an eloquent video from Center for Freedom and Prosperity which shows why tax increases are baneful to an economy.

Note: these has universal application which means that the enumerated factors applies to the Philippines as well. (hat tip Dan Mitchell)


To add, taxation isn't just harmful, they are essentially immoral.

Ludwig von Mises (Human Action): [emphasis added]

It is important to remember that government interference always means either violent action or the threat of such action. The funds that a government spends for whatever purposes are levied by taxation. And taxes are paid because the taxpayers are afraid of offering resistance to the tax gatherers. They know that any disobedience or resistance is hopeless. As long as this is the state of affairs, the government is able to collect the money that it wants to spend. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.

To draw attention to this fact does not imply any reflection upon government activities. In stark reality, peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action on the part of refractory individuals and groups of individuals. One must take exception to the often-repeated phrase that government is an evil, although a necessary and indispensable evil. What is required for the attainment of an end is a means, the cost to be expended for its successful realization. It is an arbitrary value judgment to describe it as an evil in the moral connotation of the term. However, in face of the modern tendencies toward a deification of government and state, it is good to remind ourselves that the old Romans were more realistic in symbolizing the state by a bundle of rods with an ax in the middle than are our contemporaries in ascribing to the state all the attributes of God.

Murray N. Rothbard (Tax Day):

The first great lesson to learn about taxation is that taxation is simply robbery. No more and no less. For what is "robbery"? Robbery is the taking of a man’s property by the use of violence or the threat thereof, and therefore without the victim’s consent. And yet what else is taxation?

Those who claim that taxation is, in some mystical sense, really "voluntary" should then have no qualms about getting rid of that vital feature of the law which says that failure to pay one’s taxes is criminal and subject to appropriate penalty. But does anyone seriously believe that if the payment of taxation were really made voluntary, say in the sense of contributing to the American Cancer Society, that any appreciable revenue would find itself into the coffers of government? Then why don’t we try it as an experiment for a few years, or a few decades, and find out?

But if taxation is robbery, then it follows as the night the day that those people who engage in, and live off, robbery are a gang of thieves. Hence the government is a group of thieves, and deserves, morally, aesthetically, and philosophically, to be treated exactly as a group of less socially respectable ruffians would be treated.

More Taxes Equals More Revenues?

More Taxes Equals More Revenues?

Not so fast.

The fundamental law of economics are always at work to defy conventional wisdom.

Here is a great example.

From Reuters, (bold highlights mine)

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead.

Criminal gangs and impoverished Roma communities near borders with countries where prices are lower -- Serbia, Macedonia, Moldova and Ukraine -- have taken to smuggling which has wiped out gains from higher excise duties.

Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third.

"The government created something unique. We actually now have a whole industry that provides for a big group of people," said Tihomir Bezlov of anti-corruption think-tank Center for the Study of Democracy.

Cato’s Dan Mitchell calls this the wonkish Laffer Curve at work.

But I like Professor Mark Perry’s simple quote, “If you tax something, you get less of it”

The higher the taxes, the likelihood of a larger informal economy, smuggling, corruption and inefficient allocation of resources as shown above.

Even the IMF has pointed this out as we have shown in an earlier post

NBA And Taxes

Here is an interesting article on how taxes plays a critical role in shaping of NBA’s recruitment and team performance.

From Bill Bradley of the SacBee (Hat tip SM Oliva Mises Blog)

“The absence of state income tax in Florida and Texas is a big reason the Miami Heat and Dallas Mavericks can be active in free agency.

“Compare that to the New York Knicks, whose players have to pay combined state and city income taxes of 12.618 percent. That means Amar'e Stoudemire's five-year, $99.8 million deal with the Knicks is worth about $12 million less than if he had signed with the Heat.

“While athletes are taxed by other states when playing road games, they come out well ahead if they live in Texas or Florida.

“Yes, these Florida and Texas teams had to have salary cap space to get involved in this circus. Yes, they wanted to improve their rosters.

“But think about this: There are five NBA teams in Florida and Texas. Those are the only teams without state income tax. All five are among the most competitive in the league. (bold highlights mine)

Bottom line: taxes function as a major influence on how resources or manpower are allocated, and this is obvious even in sports!

Mainstream’s Three “Wise” Monkey Solution To Social Problems

Say what you want
Say what you will
'Cos I find you think what makes it easier
And lies spread on lies
We don't care
Belief is our relief
We don't care

-Roland Orzabal, Tears For Fears, Ideas As Opiates

For the mainstream, our social problems can be simplified into three “wise monkey” solutions:

First, speak no evil-throw money at every problem.

Everyone desires a free lunch. Almost everybody believes that they deserve a special place in this world. Since society’s interests are divergent, such sense of entitlement should come at the expense of someone else. It’s usually dignified and justified with the word “right”. One man’s effort is another man’s privilege.

For them, scarcity of resources can only solved by forcible redistribution. It doesn’t really matter if there are limitations to the scale of taxation. It also doesn’t matter if redistribution reduces the incentives to produce and trade. It doesn’t matter if “picking winners” takes away resources meant for productive activities which have been meant to enhance livelihood. The only thing significant is to be at the receiving end. And it’s hardly ever been asked “when is enough, enough”?

Heck, it would even be politically incorrect to argue for prudence. ‘Moral’ justifications demand for immediate gratification. It’s almost always about NOW. Forget the future.

That’s why the intellectual classes long came up with varied theories in support of these political demands.

Importantly that’s why the political classes are enamoured with these concepts. Redistribution enhances only their power, esteem and control over the others. And that’s why “inflation” has long been a part of human nature, since the introduction of government.

For as long as the system is tolerant of such nebulous tradeoff, trouble can be kept at bay, ergo speak no evil.

The other way to see it is that while everyone wants to rule the world, in reality this isn’t feasible. It’s a mass delusion. The universal law of scarcity always prevails. By force of nature, artificially induced imbalances are resolved eventually.

Second, see no evil-elect or put in place a virtuous leader.

The popular redress to most social problems has been premised mostly on hope, cosmetically embellished by “specific” ennobling goals.

In times of frustrations, the next alternative has been to look for a saviour.

Yet hope is mostly anchored on symbolism. And these are what elections are mostly all about. Even if one’s vote doesn’t truly count, everybody believes they do. Elections are reduced to the polemic of self-import.

Hardly has the directions of policies been the context of any meaningful discussion. People’s arguments will always be simplified to what seems “moral” in the popular sense. Yet, a vote on a person to office is a carte blanche vote on the ensuing policies. But it’s hardly about stakes involved and the prospective costs, but mostly about emotions and the feeling of being in the winning camp.

And since the world has been condensed into strictly a “moral” sphere, political leaders are most frequently deemed to have been transformed into demigods.

Once in power, people mistakenly believe that these entities have transcended the laws of scarcity. People have assumed that they possess the superlative knowledge that is needed to effect the exigent balance on a complex and continuously evolving society. These leaders are presumed to know of our needs, our values, our priorities and our preferences, which lay as basis of our actions in response to ever changing conditions.

Not of only of knowledge, but people also expect leaders and officials to dispense justice and equity according to our sense of definition. Many see these leaders as reflecting on their values. And that’s why many fall for the dichotomous trappings of the well meaning “motivations”. Yet, motivations barely distinguish the role of “means” and “ends”.

Essentially genuflecting on hope to see one’s moral desires as represented by politics can be construed as refusing to see evil for what it is.

And it’s only when the rubber meets the road, from which people come to realize that their expectations have misaligned with reality-and usually through deepening frustrations or in the aftermath of some horrifying outcome.

Hardly has it been comprehended that politics and bureaucratic activities are merely HUMAN activities.

That leaders and officials are subject to the very same foibles as anyone else. That these people see things and act according to the incentives brought about by their interpretation of events, their existing limited and ‘biased’ knowledge and are swayed by influences brought about by cognitive biases, networks, familiarity, assessment of prevailing conditions, information relayed by the underlings, varying degree of stakes of involved and et. al.

Importantly like everyone else, their actions skewed based on personal values. So when a political or bureaucratic leader forces upon their sense of moral vision to a constituency and which has not well received, the result in some cases has been political upheavals.

Yet in spite of the repeated errors, people never learn from George Santayana’s admonition that those who ignore the past are condemned to repeat it.

The third intuitive recourse to any social problems is to hear no evil by enacting new rules/laws.

Like any “throw the money” and “virtuous leader” syndromes, rules are little seen for its costs but nevertheless oftenly envisaged as preferred nostrums to existing problems as identified from the biased viewpoint of the observer/s.

Causal factors are hardly considered in the appraisal of the existing problems. What seems more important is to automatically blame market forces and unduly impose proscriptions. Never mind if the past ills have been caused by the same underlying dynamic-previous interventionism.

The act of simply “doing something” is meant to be perceptibly seen by the voting public for political purposes (extension of career by vote or by appointment). Thus the “hear no evil” therapy, which is merely adding rules for extant fallibilities, are simply props for more of the same malaise.

Many rules, regulations, edicts or laws are imposed upon the “populist demand of the moment”, without the realization that rules, which tend to realign people’s behaviour, can cause huge unintended consequences and likewise entails costs of enforcement. Hence when new rules create distortions in the political economic order, the instinctive response is to have more of rules or regulations.

Importantly, popular clamor for new rules/laws hardly differentiates “rule of laws” against “rule of men”.

Rule of Law are in effect, the guiding principles or the laws that had been a legacy from our forefathers, as the great Friedrich August von Hayek wrote, ``Political wisdom, dearly bought by the bitter experience of generations, is often lost through the gradual change in the meaning of the words which express its maxims[1]”. (underscore mine)

This means because these laws have been constant, are anticipated by all and easily observed or practiced, they become part of our heritage. Again we quote the Mr. Hayek, ``Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand.[2]”

In stateless Somalia, customary laws serve as default laws after her government had been eviscerated,

Benjamin Powell writes[3], ``Somali law is based on custom interpreted and enforced by decentralized clan networks. The Somali customary law, Xeer, has existed since pre-colonial times and continued to operate under colonial rule. The Somali nation-state tried to replace the Xeer with government legislation and enforcement. However, in rural areas and border regions where the Somali government lacked firm control, people continued to apply the common law. When the Somali state collapsed, much of the population returned to their traditional legal system... But Somalia does demonstrate that a reasonable level of law and order can be provided by nonstate customary legal systems and that such systems are capable of providing some basis for economic development. This is particularly true when the alternative is not a limited government but instead a particularly brutal and repressive government such as Somalia had and is likely to have again if a government is reestablished.” [bold highlights mine]

That’s simply proof that “rule of laws” exists even outside of the realm of governments, which also goes to show that society can exist stateless. None of this is meant to say that we should be stateless, but the point is rule of law is what organizes society.

Importantly, “rules of law” have been passed through the ages as a means to protect the citizens from the abuses of the authority, again Mr. Hayek[4],

``The main point is that, in the use of its coercive powers, the discretion of the authorities should be so strictly bound by laws laid down beforehand that the individual can foresee with fair certainty how these powers will be used in particular instances; and that the laws themselves are truly general and create no privileges for class or person because they are made in view of their long-run effects and therefore in necessary ignorance of who will be the particular individuals who will be benefited or harmed by them. That the law should be an instrument to be used by the individuals for their ends and not an instrument used upon the people by the legislators is the ultimate meaning of the Rule of Law.” (emphasis added)

In short, the fundamental characteristics of respected and effective laws are those that to limited, steady or constant, designed for the benefit of everyone and importantly a law that is clearly enforceable.

Of course this doesn’t overrule the occasional use of arbitrary laws, but nevertheless arbitrary rules should compliment and NOT displace the essence of the “rule of law”.

Mr. Hayek quotes David Hume[5], ``No government, at that time, appeared in the world, nor is perhaps found in the records of any history, which subsisted without a mixture of some arbitrary authority, committed to some magistrate; and it might reasonably, beforehand, appear doubtful whether human society could ever arrive at that state of perfection, as to support itself with no other control, than the general and rigid maxims of law and equity.”

In essence, in contrast to mainstream thinking, the rule of law and not simply arbitrary regulations, serves as the central element to well functioning societies.

Former President Ronald Reagan nicely captures part of our “Three Wise Monkey” solution as seen by the mainstream, “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”, from which I would add, “if subsidies are not enough, elect one who makes sure it would”.

---

[1] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[2] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[3] Powell, Benjamin; Somalia: Failed State, Economic Success? The Freeman

[4] Hayek, Friedrich August von, The Road To Serfdom

[5] Hume, David; The history of England, from the invasion of Julius Caesar to the revolution, we earlier quoted this see Graphic: Origin of The Rule of Law

Lessons From The Great Depression: Taxes, Protectionism and Inflation

Economist Art Laffer of the Laffer Curve fame gives us an enlightening perspective from the experiences of the Great Depression.

We will be quoting Art Laffer extensively from the Wall Street Journal,

1. Taxes and Protectionism were key factors...

``While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.

``In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.

``But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.

``Because of the number of states and their diversity I'm going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I'm sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, '31 and '32 respectively.

``The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon."

2. Inflation (hidden taxes) Amidst A Depression

``...the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.

``The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.

``By mid-1932 there were public fears of a change in the gold-dollar relationship. In their classic text, "A Monetary History of the United States," economists Milton Friedman and Anna Schwartz wrote, "Fears of devaluation were widespread and the public's preference for gold was unmistakable." Panic ensued and there was a rush to buy gold.

``In early 1933, the federal government (not the Federal Reserve) declared a bank holiday prohibiting banks from paying out gold or dealing in foreign exchange. An executive order made it illegal for anyone to "hoard" gold and forced everyone to turn in their gold and gold certificates to the government at an exchange value of $20.67 per ounce of gold in return for paper currency and bank deposits. All gold clauses in contracts private and public were declared null and void and by the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax.

``The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that's the story.

``The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon."

Chicken Tax: Example of Distortive Effects of Taxes and Regulations

This is a superb example of the distortive effects of taxation and regulations on the marketplace.

Fundamentally, regulations and taxes affect people's behavior. And market participants usually circumvent or go around regulations to resume their business, even in odd or perverse ways.

This From Wall Street Journal's To Outfox the Chicken Tax, Ford Strips Its Own Vans

(Bold highlights mine)

``BALTIMORE -- Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

``Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

``The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.

``Why all the fuss and feathers? Blame the "chicken tax."

``The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.

``The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks.

``The company's wiggle room comes from the process of defining a delivery van. Customs officials check a bunch of features to determine whether a vehicle's primary purpose might be to move people instead. Since cargo doesn't need seats with seat belts or to look out the window, those items are on the list. So Ford ships all its Transit Connects with both, calls them "wagons" instead of "commercial vans." Installing and removing unneeded seats and windows costs the company hundreds of dollars per van, but the import tax falls dramatically, to 2.5 percent, saving thousands."

Read the rest here

(Hat tip: Mark Perry)

AIG Bailout: A Model of Failed Government Intervention?

Public Administration Case Study: The AIG Bailout

First, AIG went to the US government to ask for a bailout under the justification that its failure might risk a "catastrophic collapse" for banks and money funds. (scare tactic)

Next, AIG receives the money and spends much of these on paying out or "rescuing" AIG counterparties...

courtesy of nicolasrapp.com

Then, they spent the part of the taxpayer's money as bonuses to the company's employees.

Apparently this caught the eyes of media which subsequently incited a mass hysteria against the "morality" of taxpayer shouldered largess...

Micheal Lewis of Bloomberg wrote of how the brouhaha over AIG's bonuses has obscured some simple truths. Excerpt below...

1) To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions....

2) As the financial crisis has evolved its moral has been simplified, grotesquely. In the beginning this crisis was messy. Wall Street financiers behaved horribly but so did ordinary Americans. Millions of people borrowed money they shouldn’t have borrowed and, not, typically, because they were duped or defrauded but because they were covetous and greedy: they wanted to own stuff they hadn’t earned the right to buy.

3) The complexity of the issues at the heart of the crisis paralyzes the political processes’ ability to deal with them intelligently.

Be sure to read of the rest of the discerning article here

Lastly because of the furor, legislators rushed in to exact vengance...unfortunately by punishing the economy.

How? By licensing the abrogation of contracts, by passing retroactive taxation and by making taxation punitive.

This astute commentary from David Kotok of Cumberland Advisors (bold highlight mine),

``The result of this House action is already damaging. The federal regulator of Fannie Mae and Freddie Mac has shown the courage to ask that this law not be advanced in the Senate. We expect to hear more from those federal personalities who have the strength to speak up and oppose this House-approved proposal.

``But depending on the Senate to soften the law or depending on the US Supreme Court to overturn it is a dangerous strategy. Some Congressmen admitted privately that they voted in favor because of constituent pressure, even though they were really opposed to the concept. They voted “yes” because they were relying on the Senate or the courts to say “no.”

``Some damage is already done. Firms that were gearing up to participate in the federal program to be announced this coming week are considering withdrawal. They fear that any action which puts them into the federal assistance plan will subject them to the chance of retroactive punishment and taxation. The House has undermined the so-called public-private partnership designed to help restore financing of consumer items like automobiles and credit cards."

So those hoping for a quick economic recovery from the barrage of government intervention should see the reality-the visible hand has pernicious unintended effects.

Authorities appear to be immensely confounded by the clash of interests among various economic agents in the AIG dilemma: those being bailed out (e.g. AIG,'s CDS counterparties, bondholders, etc.), the unwitting participants (e.g. employees), the public (taxpayer money, mass hysteria/sentiment) and the economy (the passage of reactive populist laws that are business unfriendly).

Perhaps AIG's experience should be a paradigm of 'how NOT to bail out a company'...

Environmental Politics Dottiness: Taxing Cow Farts! Human Farts Next?

The "Green" theme has evolved from science to patent religious zealotry or wanton absurdity...

Take this news from the timesonline.com "What do cars and cows have in common? No, not horns"

Excerpts from the article with all bold highlights mine...

``Proposals to tax the flatulence of cows and other livestock have been denounced by farming groups in the Irish Republic and Denmark.

``A cow tax of €13 per animal has been mooted in Ireland, while Denmark is discussing a levy as high as €80 per cow to offset the potential penalties each country faces from European Union legislation aimed at combating global warming."

``The proposed levies are opposed vigorously by farming groups. The Irish Farmers' Association said that the cattle industry would move to South America to avoid EU taxes.

``Livestock contribute 18 per cent of the greenhouse gases believed to cause global warming, according to the UN Food and Agriculture Organisation. The Danish Tax Commission estimates that a cow will emit four tonnes of methane a year in burps and flatulence, compared with 2.7 tonnes of carbon dioxide for an average car.

``Agriculture, transport and housing are not included in the EU's Emissions Trading Scheme (ETS), which enables industrial companies to buy and sell permits to emit carbon dioxide. Instead, EU member states are obliged to cut the emissions from non-ETS sectors by 10 per cent overall by 2020.

``While Romania and Bulgaria will be allowed to increase emissions, Ireland and Denmark are each faced with cuts of 20 per cent in farming sector emissions.

``The cow tax proposals would raise funds to buy allowances from other member states or to invest in technology that might reduce emissions. Denmark is believed to be further advanced with housing for pigs that captures and stores methane emitted from the animals. The gas can be used as a fuel for power generation."

My comment:

What the article didn't say?

If you want more of a 'thing' you reduce its costs, if you want less of the same 'thing' you raise its cost.

Alternatively, by taxing livestock farming which means raising the cost of meat production, governments in essence wants people to reduce meat intake...unless of course you are willing to pay for it with higher prices.

On the other hand, a shift in production and consumption patterns due to such taxes, essentially leads to higher prices across the board for food items, i.e. production of livestock will be reduced or moved overseas (causing shortages of supplies), while demand will likely shift to non-meat products (raising the cost of seafoods,vegetables and etc.).

The other unseen cost is that the demand substitution as a consequence to such obtuseness will equally strain environments, i.e. overfishing, overcropping etc... will translate to other unintended consequences (drought, desertification, fish depletion, pollution, etc.).

In a choice between human and environment, these taxes are skewed towards preserving environment than people. How sensible can this be?

In short, governments have implicitly been promoting HUNGER out of the ridiculous notion that cow farts have been causing greenhouse gases.

What's next, tax human fart?

The Tragedy of Political Mascotism

``It is our moral and rationally selfish obligation to help others understand that freedom is not free.  And one of the biggest costs of freedom is an end to government handouts.”-Robert Ringer

 

Political mascotism is when incumbent political leaders use the underprivileged to dramatize or “put a face” on the predicaments of the society and to represent the “deprived” sectors supposedly meant to benefit from their proposed political programs.  This showcase of symbolism has been a conventional feature for almost every incumbent President of the Philippines during their SONA (State of the Nation Address).

 

Unfortunately for Mang Pandoy (Felipe Natanio), who served as the model of “courage and dedication to improve life” for the 1992 SONA of former President Fidel V. Ramos, passed away last week in the same destitute and disadvantaged conditions prior to his ascension as a political icon. RIP Mr. “Mang Pandoy” Natanio.

 

While media seemed quick to pounce on the opportunity to imply of the personality based “failure of leadership” attributes, what appeared to have been lost in the tragic Mang Pandoy experience is the most important lesson of all: the failure of government intervention through the patron-client based political economy.

 

We learned that following FVR’s SONA in 1992, Mang Pandoy was accorded with a television show “Ang Pandayan ni Mang Pandoy” (inquirer.net)which he co-hosted in a government owned TV station. Unfortunately, because of the lack of continued appreciation from the public, the show lasted for only 3 years. Although at the same time he was also appointed with a short-lived job at the House of Congress which likewise came to a close as his “popularity” faded.

 

But there had been other opportunities which he reportedly have also wasted; he was said to have been given livelihood projects which included a hog raising package, aside from scholarship grants for his children-from which none of his children availed to its fullest because of “lack of allowance and daily fare.”

 

UP professor Randy David quoted by the Inquirer.net poignantly encapsulates Mang Pandoy’s hapless living conditions (highlight mine), ``He had ended up expecting the government to help him all the time. But help was not always there.”

 

So instead of a role model for social and economic upliftment as the former President had envisioned for Mang Pandoy, he turned out to be a paradigm of unintended consequences for government welfare programs.

 

Apparently Mang Pandoy and his family’s utter reliance on government support have cost them numerous opportunities to progress. Applied on a multiplier scale, this is what I decry as the “dependency culture”, where absolute dependence on welfare programs or from gratuity of politicos translates to bigger government spending which takes a toll on the productivity aspects of the society. 

 

And lost productivity means higher costs of doing business which extrapolates to higher hurdle rates or lesser investment opportunities needed to boost the capital stock of the economy. Yet, without investments we can’t get the Mang Pandoys of the society out of poverty.

 

Remember, governments are essentially consumers of capital.  That’s the reason why they tax and use the coercive arm of its institutions to enforce collections. And when governments spend more via intervention in order to provide the Mang Pandoys their share of the economic pie, it also means that someone else would have to fund these activities. Funds, which should have been efficiently allocated to productive sectors and thus expand the labor pool and incomes, ends up subsidizing non-productive jobs or activities.

 

As the illustrious Ludwig von Mises of the Austrian School of Economics wrote in Socialism, ``All almsgiving inevitably tends to pauperize the recipient” aptly describes on the conditions of the Mang Pandoys of our society.

 

Yet lamentably our Mang Pandoys elect for the illusion of perpetual government sustenance instead of living on the ideals of having “courage and dedication to improve life”-the slogan ironically contrived by the former President Fidel Ramos for our Mang Pandoys. Noble sounding political slogans almost always end up as empty rhetoric.

 

Paradoxically too, the Mang Pandoys are the very constituents from where most of our politicians derive their innate strength for expanded political power. By pandering on the masses and to media by catering to the abstractionisms of “guiltism, envyism, villainism, covetism, and angerism” to quote self development author Robert Ringer, by encouraging more economic and financial dependence and by peddling the charade of simplified cure all solutions or elixirs to the society’s complex problems so they can arrogate for themselves more control over our lives and expand access to financing to whimsically bankroll programs for political or personal reasons.

 

In the words of conservative economist Thomas Sowell, ``Politics is largely the process of taking credit and putting the blame on others-- regardless of what the facts may be. Politicians get away with this to the extent that we gullibly accept their words and look to them as political messiahs.”

 

And while corruption has been a popular political issue, it has hardly been dealt by the media and our experts as a symptom to a systemic disease but one of personality based disorders which seem to always recur, if not deeply rooted in the bureaucratic culture. Hardly anyone tells you that the systemic corruption is an offshoot to BIG government. You reduce chances of corruption by minimizing their political power and by slashing wasteful and nonproductive discretionary spending.

Yet day in and day out we hear politicians offer themselves as the solutions to our problems. At the end of the day, we all end up as losers with the Mang Pandoy’s enduring most of the brunt. Headline stuff indeed. Unfortunately we never seem to learn.

The Controversy Over Oil VAT (Visceral and Astigmatic Thinking)

``No government ever wants less government — that is, less of itself." Garet Garrett (1878–1954), Insatiable Government, American journalist and author

Populism is anything panacean.

Popular political demand has it that the lifting VAT on oil prices will provide relief to consumers.

No quibble on that- yes “automatic and short term relief” that is.

But, alas the thinking STOPS here!

Look at the table provided by ADB above (shown this last week).

It shows that Filipinos spends an insignificant 2.4% of their income on energy expenditures relative to the aggregate. This means food prices does more of the damage to household spending than energy/oil. It also means households are less sensitive (more inelastic) to price changes of fuel relative to food-and so is the reason why car sales remain buoyant instead of a retreat even under surging fuel costs.

In other words, given the accuracy of estimates in the table provided by ADB, what you see in the news reflects popular dissent over higher food prices than fuel. Thus, oil prices reflect more of the political dimensions (since it’s easy to pick on oil as a culprit knowing that this is PRIMARILY an external causality).

Will the magic wand of lifting VAT ease oil prices? Yes, as argued above-temporarily.

But economic logic tells us that lower prices INCREASES demand.

This means that if oil prices in the Philippines have not reached the threshold of “demand destruction”, increased demand will OFFSET any lowering of prices from the VAT suspension.

Essentially this brings us back to square one- High oil prices but with a gaping fiscal hole! What was deemed as a solution complicates the situation even more.

Hence, what then would be the next item to blame? Will the next political demand be "Nationalization"? (Hahaha!-Philippines import almost all of its crude oil requirements which should translate to a total havoc to the national balance sheets!)

One senator suggested that VAT be replaced with a hike in luxury items (particularly car sales). The honorable senator forgets the effects of high taxes on car sales: car smuggling or legal loopholes which has resulted to the recent brouhaha over “used” car imports from economic zones (see Diesel Roll Back For PGMA’s Sona, MV Princess of the Stars Tragedy, Economic Realities of Cagayan’s Used Car Trade).

Another venerable senator suggests "efficiency" in tax collection by curbing car smuggling. Wonderful, another ideal solution- yes (we agree)! But then again this is nothing new and has been a battlecry for almost every aspiring politician. Yet, such motherhood statements or grand nostrum of lack of “efficiency” goes back to the paradox of overregulation, legal loopholes and bureaucratic leakages and corruption.

So, in effect both Senators have been discussing solutions based on a chicken and egg perspective but don’t deal with the heart of the problem!

The principle of taxation basically is the funding of government expenditures (for whatever programs) derived from revenues levied from its constituents, us the taxpayers.

Rising government expenditures without the necessary funding will compel government to borrow and or print money which results to the deterioration of the national balance sheet or the fiscal deficit.

When government competes with or “crowds out” the private sector in raising money this raises the cost of money while at the same time reducing productivity which derails investments.

Over the longer horizon, if alternative options of borrowing and printing money under degenerating deficits become unsustainable, the government will again be forced to raise taxes furthering our economic agony of rising unemployment, lack of investments, higher cost of living and depreciating currency.

Yet beyond the public’s knowledge; the demand for “reckless” spending to accommodate populist causes could entail the risks of hyperinflation! You should look at the classic hyperinflation paradigm unfolding in Zimbabwe see The Race To Currency Destruction (Hyperinflation): Want to be a billionaire?

Tersely said, short term popular elixirs will only lead to longer term pain. A cure worse than the disease.

While everyone wants to be relieved of high oil prices and the burden of taxation, what people should realize is that cuts in taxes NEEDS TO BE ACCOMPANIED BY A CORRESPONDING DECREASE IN GOVERNMENT SPENDING.

What I am trying to say is that an abolition/suspension/moratorium of VAT should come with DECREASED spending and not shifting of burdens by imposing other taxes, which lead to more inefficiencies in the economy and avenues for more corruption.

None of our political officials have proffered such option because it takes away their inherent privileges of constituent dependency or the basic premise for their existence.

That’s why populism is almost always about intuition, vacuousness and immediate pacification instead of sound policies that ensures productive economic growth by accumulating capital.