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Monday
Sep062010

Taxes Evaporate the Economy

The current debate over extending the Bush tax cuts is a classic demand-side economic argument. On one side, Conservatives are promoting across-the-board extensions to, among other things, encourage the wealthy to make capital investments. The other side, lead by Obama, says demand is best served by lowering taxes on the poor, who are more likely to spend, and raising taxes on the wealthy to fund government 'investments' in the economy. The idea is that tax cuts for the wealthy rob government planners of capital needed to guide the country out of recession.

On the surface, the liberal theory seems to work.  Not a week goes by without Obama visiting a clean energy company made possible by government largesse.  At each stop, Obama stands in the factory in front of the cameras repeating the mantra: government expenditures are pulling the economy out of the ditch. 

To answer Obama's liberal vision, we turn to the late French politician and free market economist M. Frederic Bastiat (1801-1850) and his classic Essays on Political Economy.  Admittedly, Bastiat lived during a time when political messaging wasn't as sophisticated--before big government types learned to call taxing and spending 'investment'--but the argument put forth below is strikingly relevant today.

"Have you never chanced to hear it said: 'There is no better investment than taxes.  Only see what a number of families it maintains, and consider how it reacts upon industry:  it is an inexhaustible stream, it is life itself...'

In order to combat this doctrine, I must refer to my preceding refutation.  Political economy knew well enough that its arguments were not so amusing that it could be said of them, repetitions please.  It has, therefore, turned to the proverb to it own use, well convinced that, in its mouth, repetitions teach.

The advantages which officials advocate are those which are seen.  The benefit which accrues to the providers is still that which is seen.  This blinds all eyes.

But the disadvantages which the tax-payers have to get rid of are those which are not seen.  And the injury which results from it to the providers is still that which is not seen, although this ought to be self-evident.

When an official spends for his own profit an extra hundred sous, it implies that a tax-payer spends for his profit a hundred sous less.  But the expense of the official is seen, because the act is performed, while that of the tax-payer is not seen, because, alas! he is prevented from performing it.

You compare the nation, perhaps to a parched tract of land, and the tax to a fertilising rain.  Be it so.  But you ought also to ask yourself where are the sources of this rain, and whether it is not the tax itself which draws away the moisture from the ground and dries it up?

Again, you ought to ask yourself whether it is possible that the soil can receive as much of this precious water by rain as it loses by evaporation."1

 

1. M. Frederic Bastiat, Essays on Political Economy, (New York: Putnam and Sons, 1874), 58-59.