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Taxes, the Constitution and the Slippery Slope

[Note: This was written several weeks ago but not published so it’s a little out of date.]

A modern-day “conservative” is basically a libertarian who doesn’t believe in slippery slopes.  Indeed, there is a widespread denial of the phenomenon which defies logic.  Nearly every time someone tries to point out that something the government wants to do may lead to undesirable consequences, they are met with an automatic dismissal–“oh what the slippery slope argument?” (rolls eyes)—as though practically every time someone has warned of a slippery slope, it hasn’t ended up being the case. (See “argument from intimidation.” )

The left has to whitewash the notion of a slippery slope because their entire movement is based on it.  It is all about getting people to go along with things that most of them wouldn’t want through subtle manipulation over a long time-period.  It’s right there in their name—“progressive.” For too long, conservatives have allowed the government to start down these slopes and then tried to steer the slide away from the collectivist disasters that they are designed to funnel us into.  But they are always one (and quite often several) steps ahead of us because they designed the slope in the first place so that whenever we try to steer around Scylla, there is an undetected Charybdis waiting to swallow us up.  Nowhere is this more apparent than in the healthcare debate.  I will get into the economics of healthcare next time but first we have to talk taxes.

There is a real divide in political ideology in the country but it is not between Democrats and Republicans or liberals and conservatives.  It is between people who think society should be socially engineered through force by a centralized authority and those who think it should not.  It’s true that most of the people on the “should not” side are also on the conservative/Republican side.  But how often do you hear a “conservative” pundit say they want “small government” and then in the next segment call for the government to do something to bring down gas prices, fight “speculators,” save children from their parents and engage in all sorts of other interventions designed to engineer society in a supposedly conservative way?

Taxes

In order to have a government you need taxes.  In order to be free, you must have an absolute prohibition on the government (at least the Federal Government) using the tax code to socially engineer society.  Once you let go of the premise that social engineering is the proper purpose of government, and that the proper role of the individual is to try to influence the government to engineer it in the way that individual desires, then you become a libertarian (welcome aboard).  To most conservatives, this sounds great until they realize that giving up this notion means giving up your mortgage interest credit, your earned income credit, your continuing education credit, etc.

Of course, a libertarian tax code would also get rid of all the credits that you don’t use and offset this with lower rates (way lower rates if we also had a libertarian spending policy), so nearly everyone would be better off.  But strangely no congressman ever proposes a bill eliminating all tax credits and lowering rates.  Why is that?  Perhaps it’s because politicians like power and their power derives largely from their ability to divert money to specific segments of the public.  But I digress.

The Constitution

The founding fathers were libertarians.  In light of this, doesn’t it seem like they would have put something in the constitution prohibiting the Federal Government from using the tax code to target certain individuals and behaviors in order to socially engineer society?  Yes it does, and in fact they did just that.

“Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers…”

-Article 1, Section 2, Clause 3

“No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.”

-Article 1, Section 9, Clause 4

So how is it that we just witnessed the Supreme Court uphold a bill which gives the Federal Government the power to force every individual to buy healthcare on the grounds that the penalty for not complying is actually a tax?  The answer, of course, is that we allowed progressives to undermine this important provision of the constitution a hundred years ago when we passed the 16th amendment.

You might recall when President Obama expressed his regret that the constitution was only a charter of negative rights saying what the government can’t do to you and not a charter of positive rights saying what the government must do on your behalf.  The response of conservative commentators was to shout “see, he wants to change the constitution from a charter of negative rights into a charter of positive rights!”  But this was a misdirection, as I pointed out a while back.

What we should have said is “wait a minute, it’s actually not either of those things, it is a charter of enumerated powers.  It says what the government may do on your behalf.”  This is a very important distinction. All of the debate over the healthcare law was centered on the commerce clause.  The question was posed: can the government force us to buy broccoli under the commerce clause?  The court avoided answering this question, and so far nobody is asking the same question with regard to the power to tax.  Can the government “tax” me if I don’t buy broccoli?  Of course, the answer is yes.  Whatever the government wants me to do, it can declare a tax against me if I fail to do it.  There is no longer anything which falls outside of the enumerated powers of the Federal Government.

So what is the point of the constitution then?  It stops the government from discriminating against me based on race, infringing on my freedom of speech, freedom of religion, right to bear arms, etc. The protections contained in the constitution have been reduced to only those protections which are specifically mentioned.  In other words, it has been transformed into a charter of negative rights.

The slippery slope

Imagine the response if, in 1913, you had stood up and said “if we allow this amendment, there will be nothing stopping the government from taking over the healthcare industry, or any other industry, and telling us what we have to buy, and how much we have to pay for it, because this will ultimately transform the constitution from a charter of enumerated powers into a charter of negative rights.”  But the reality is that this power to tax us however they see fit, does give them the power to do pretty-much anything they want to us.  (Speaking of slippery slopes, in 1913, the top rate was 7% and this was supposed to be temporary.  By 1918, it was 77% and in 1944, the top rate was 94% and the first bracket was 23%)

I’m not making a slippery slope argument in reference to the future. I am making it in reference to the past.  We have been sliding for a century, the whole process is right there in the history books.  There is no speculation involved, you just have to look around and notice that we are at the bottom of the hill.

It’s not enough to just blame Obama or Democrats or Chief Justice Roberts or the media for what is happening.  This is happening because Americans have lost touch with the moral and philosophical foundations of liberty.  If we hadn’t we would have stopped it in 1913 (along with a lot of other things that started in 1913).  Progressives actually don’t want liberty and they are purposely trying to undermine it.  Conservatives don’t want this, we have just been tricked into going along with it.  But the reason we fell for it is because we stopped being libertarians.

This government is a Hydra with so many heads nobody can count them.  There is always one head nuzzling up to you while six others are devouring your neighbor.  Then, when one suddenly comes for us, our reaction is to try to cut off the head, but even if we succeed in cutting it off, two more spring forth (repeal and replace?).  In the end, everyone gets eaten unless we actually slay the monster—unless we can look at the head nuzzling us, the head devouring us and the head claiming to be protecting us from the one that is devouring us and say “you all gotta go”–in short, unless we become libertarians again.

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Morality and Government

January 18, 2012 3 comments

This is a continuation of what I started in this post on morality and ethics.  The position I am disputing is that government shouldn’t tax because taxation is theft and theft is immoral.  Let me say up front, that a government which could accomplish its purpose without taxation would be ideal and I believe it’s possible that this could be achieved.  If we could start a government from scratch with people who all believed as Thomas and I do, we might be able to fund the government with only voluntary payments (to be fair this is exactly the scenario he was dealing with in his original post).  I won’t get into how that could be done but I’m not trying to prove that it’s impossible here. My issue is with the attitude that there is a universal morality which government must (or at least ought to) follow.  And if we have any interest in fixing this thing before it gets so bad that we have to rebuild a society out of the ashes, we can’t have that approach.  We are so far away from a national consensus that taxation is theft and should be outlawed altogether that if you adopt this position your only option is to wait for the collapse of society.   The real important thing is that the government be prevented from using taxation to redistribute wealth and manage its distribution.  This does not require a complete moratorium on taxation.

A government has no morals.  It has no morals because it is not a creature.  It is a tool created by people to perform some task.  Tools do not have morals.  A hammer can be used for building a house–a noble pursuit–or committing a murder–not so noble.  If I am making a hammer, I cannot imbue the hammer with a moral objection to murder.  There are however, some things I could do to make it more difficult to commit murder with my hammer.  I could remove the forks on the back or perhaps put a layer of foam rubber around the whole head except for the face.  If I really wanted to be sure, I could even cover most of the face leaving only a small hole in the foam rubber that would have to be lined up precisely with the nail on every strike in order to work.  These things, while making it more difficult for someone to use my hammer for murder would also make it less useful for building houses. Read more…

Atlas Now?

April 24, 2011 2 comments

If Ayn Rand wrote dialogue like this, you know her detractors would call it ridiculous and unrealistic.

This was one of nearly a dozen “clawback” orders signed in two months under the state’s new Republican governor, John Kasich. There will be more, says his job-creation director, Mark Kvamme: “We need every single dollar we can get our hands on.”

YUSA’s view: “Give me a break,” says Chris Fairchild, the auto-parts firm’s controller. “For crying out loud, we’re doing our darnedest. While other local businesses have gone bankrupt or gone to Mexico or other states, we’re right here. You’d think there would be a little respect for that.”

The budget vise squeezing states and cities is changing the economic-development game. Governments are attaching more strings to their offers of tax breaks, cheap rents and bond deals designed to lure business, and are getting tougher on past recipients who didn’t come through.

Here’s the full story.

Categories: Atlas Now? Tags: , ,

Small Business Bill

August 25, 2010 Leave a comment

Democrats are here to save you small business.  You didn’t realize they were on your side did you.  But don’t worry, they’ve got a new bill  with a bunch of goodies in it for you including the following.

In addition to the lending program, it would allow certain small businesses to apply tax credits to the previous five years, instead of the current one year, and let investors avoid capital gains taxes on certain small business stocks.The legislation also would increase the limits on a variety of Small Business Administration loans.

So basically they are going to give money to “certain small businesses” probably for engaging in certain behavior of which they approve.  We need to wake up to the reality of the 16th amendment.  They can use the tax code to control anything they want.  They are creating a world where only businesses they like will survive, just like they have done with the state governments.  I will leave you with a quote from Keynes.

Thus we might aim in practice (there being nothing in this which is unattainable)… at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.

Categories: Uncategorized Tags: , ,

A Model of the State (What Would a Dictator Do?)

July 28, 2010 2 comments

Let us begin with a model of dictatorship.  This follows from the basic story layed out in The Role of the State.  We begin with a dictator who has established control over some group of subjects.  The dictator incurs some cost in order to protect the property of his subjects.  This is assumed to be an increasing function of the amount of wealth created and will be denoted G(Y) where Y is total output.  So if the population is fixed and equal to N, then each individual (they are assumed to be identical) produces y=Y/N.  Also, the dictator decides what percentage of output to seize (tax) from his subjects.  Let this percentage be denoted by t.  This means he will receive income equal to tY.  The problem faced by the dictator will be to choose t in order to maximize his profit given by tY-G(Y).

In order to do this, the dictator will have to consider the maximization problem faced by his subjects.  The issue, in a nut shell, is that the higher the tax rate t, the less incentive there is for people to produce because they get to keep a smaller percentage of their output.  This can be seen easily by imagining that each member of the economy produces output according to the production function y=l where l is the quantity of labor an individual devotes to production.  Also let us assume that each member faces a cost of labor c(l) which is increasing and convex (increasing at an increasing rate).  The amount of output that a worker gets to keep will be (1-t)l-c(l). (For simplicity I am measuring the cost as the value of foregone leisure in terms of output, so in other words I am counting that as lost goods which means the proper way to interpret this is as the amount by which the workers wealth increases from their initial state where they have all leisure and no production goods.  This is somewhat simpler, and in my opinion no less accurate, than dealing with a worker with a utility function over consumption and leisure)  So the worker’s first order condition for the maximization of this expression will be

c'(l)=1-t                           

From this we can easily see that when t increases the marginal cost of labor will have to decrease which means he will produce less (since c”(l)>0).  Going forward let us assume that c(l)=l^2.  This will make the above equation

2l=1-t

which means l and y will be given by

y=l=(1/2)(1-t).

Plugging this into the dictator’s profit gives us

t(1/2)(1-t)N-G[(1/2)(1-t)N]

Now, to make is simpler, let’s let G(Y)=Y/5.  This means that the first order condition for the dictators maximization problem will be (notice that the Ns cancel out)

1/2-2t*+1/10=0

This will give us

t*=.3     y=.35   

The profit to workers will be .35(1-t)-.35^2=.1225.

The profit to the dictator will be .3(.35)N-.2(.35)N=.035N.

Now let’s imagine a government of some form which makes decisions in order to maximize the prosperity of its citizens rather than of the dictator.  In this case, the government will need to raise just enough money to pay the expense of protecting the economy’s output.  Mathematically, we can impose the constraint

tY=(1/5)Y              which implies t=1/5

In other words, we can just set the tax rate equal to the marginal cost of protection (if G( ) were not linear this would work out a little different).  In this case the problem for each individual worker will be to maximize

.8l-l^2

which gives the first order condition

.8-2l=0

so l* (and y*) will be .4 and the profit to workers will be .8(.4)-.4^2=.16.

There are two important things to notice here.  First is that this benevolent government makes citizens richer by transferring the profit formerly accrued by the dictator to them.  Second, this is more efficient.  This can be seen simply by noting that output increases when the dictator is removed (in this case from .3 to .4).  This also makes the citizens better off.  This happens because the dictator, in his attempt to capture as much wealth from the society as possible, damages the incentive to produce.  He will not destroy it entirely because this would also destroy his source of wealth, but he will do so to an extent which is inefficient.  It is in an attempt to acquire both of these benefits for the people, that men endeavor to establish free rule of law societies.  The rule of law allows men to get the benefits of secure property rights without surrendering to a dictator the ability to loot their property to whatever extent he desires.

Now with this in mind consider the Laffer curve.    This is a theoretical curve showing the total amount of tax collected as a function of the tax rate.  For low levels of the tax rate it is increasing and for high levels it is decreasing.  This was the argument used in the Reagan administration to justify lowering the tax rate.  The position of that paragon of small government conservatism was that the tax rate was so high that it was on the downward sloping section of the Laffer curve so we could actually get more revenue by lowering the tax rate.  And this is the same argument going on now.  In a brilliant sleight of hand, Democrats are now claiming that we need to raise taxes in order to reduce government deficits and Republicans are saying that we need to lower taxes to “stimulate the economy” in order to lower deficits.  The entire debate amounts to an argument of where the maximum point of the Laffer curve is.  In other words, what tax rate maximizes government revenue?  Or in still other words, what would be the appropriate tax rate for an absolute dictator to impose on the economy?

You see the argument made by the Reagan administration was not that the government had no right to confiscate your property to whatever extent it desires.  The argument was that the government could actually confiscate more of your property if it lowered the rate of confiscation.  This argument would have been no less compelling had it been made to Castro.  And this is the closest thing we’ve had to a small government republican administration in… I don’t know let’s say fifty years (Ike wasn’t that bad I guess…). 

So how did we get here?  We kept convincing ourselves that we could get more stuff from the government without paying for it.  Now we have such a massive government (and government debt) that the maximum amount they can possibly confiscate is barely enough to pay the expenses of that government (and actually it’s probably far short of that amount).  This lack of foresight on our part has not only allowed the argument to become “what would a dictator do?” but it has allowed them to have the argument in the name of “fiscal responsibility.”