 This is a talk on the Rothbardian theory of taxation and there's a lot to it you know Rothbard wrote a lot about this in power and market and a few other places and we you can't discuss all of it in one hour but I'm going to try to hit on some of the high points of Murray Rothbard's thinking on taxation and it's a great example of you know one of the top Austrian economists of the era who applies Austrian economics to a critical analysis of sort of mainstream thinking about the economics of taxation in the field of public finance not a lot of Austrians wrote in the public finance Mises really didn't address that whole area it's a subdiscipline in the field of economics he wrote about finance of course you know and business cycles and so forth but there's a whole subdiscipline of public finance that he really didn't say much about but Rothbard was different Rothbard looked at all of it and and so it's a good good way to see you know how Austrian economists challenge the mainstream thinking on something and the first thing I'm going to do is talk about loopholes you know it's been it's always in the news it seems like if you if you read the news about what's going on in Washington they're always condemning tax loopholes you know even even the word loopholes is a loaded term it's sort of like you know something good is going to escape through the loophole you know we've got to close that loophole it's not a good it's not a good thing but Rothbard's analysis was very different than that type of thinking because when you think about it when when you hear of all the politicians of Republicans and Democrats complain about tax loopholes we've got to close tax loopholes they're saying we need to raise taxes they're saying you have too much money in your pocket and we don't we need more money in our pocket we the politicians we need to spend more of your money that's that's what they're saying despite the language of loopholes and deductions and and and so forth and there's some examples I have some old examples here but they sound exactly like what you could have heard two days ago in the in the Wall Street Journal or the Washington Post in discussions of tax reform this was from an Associated Press report during the Bush administration it's the exact same words you could find a week ago they said the administration wants to simplify the nation's tax laws by eliminating tax deductions but they warn that such proposals are often thwarted by Washington lobbyists determined to protect special tax breaks for their clients and say that's a bad thing President Bush said he wanted a fair tax without tax loopholes for special interests and you've heard all this before it's all very familiar and of course he favored a flat tax that gets rid of deductions and then this article says that other conservative tax reformers argue for reduced income tax rates that are paid for by eliminating or scaling back tax deductions and that's that's the language that's always used that and the language of paying for income tax rate reductions by eliminating loopholes the assumption is that never under any circumstances should Washington DC ever take in a penny less in revenue that's the assumption you and I can lose our jobs we can have a lower pay we can be unemployed but not Washington no no circumstances should they ever take in one penny less and that's the language of it and when economists say these things they make it they try to make it sound scientific they call it neutral taxation or tax neutrality but but it's of course it's not scientific it's a loaded normative normative term and you know all this talk it's not a stretch to call this talk socialistic or based on socialism all this talk that the government has to raise one tax it gets rid of another tax or it's a bad idea to have loopholes and I'm going to quote Frank Chateroff on this there's a great book on the income tax called my Frank Chateroff that would recommend Chateroff was one of Rothbard's old right heroes that's a V there it's called the income tax root of all evil and here's one of the things he said about this point in his book on page 11 that the state is saying to its citizens your earnings are not exclusively your own we the state have a claim on them and our claim precedes yours we will allow you to keep some of it because we recognize your need but not your right but whatever we grant for you grant you for yourself is for us to decide he's talking about the existence of income taxation he says moreover the amount of your earnings that you may retain for yourself is determined by the needs of government and you have nothing to say about it so that that's Frank Chateroff saying that in essence this is what income taxation says that when that when governments adopt an income tax they're saying we have nationalized your income your income is ours you know you're a slave to the state and we will decide for you how much of your the fruits of your labor you can keep by first deciding what our needs are not your needs are in the us the state and then we will adjust the income tax rates accordingly according to what we think is enough for you to keep from your own labor okay and so another thing Chateroff said he says when the income tax amendment was passed this was the year 1913 in the US said this quote the absolute right of property in the United States was violated and that of course is the essence of socialism whatever else socialism is its first tenant is the denial of private property all socialists beginning with Karl Marx have advocated income taxation and the heavier the better and that is certainly true it's your property your money that you you earn with your work your labor in the government essentially nationalized it when it adopted the income tax okay and so that's one way of thinking and Rothbard would have would certainly have endorsed this because as I said Chateroff was one of his favorites and he loved this book income tax root of all evil by Chateroff it's for sale out here I saw it they sell some copies out there and it really is a good book and another thing that economists talk about is with loopholes and tax deductions economists try to make it sound value-free when they talk about how the existence of tax deductions causes what's called a dead weight loss or social cost that is if you have you and I are motivated to find ways to reduce our taxes looking for loopholes hiring lawyers or tax accountants to find tax deductions tax loopholes for us I hire a very good one he's he's really well worth the money and in you know I thought I knew something about how to avoid taxes legally by over the years by doing my own taxes for years but this guy is a like a genius and then this because it's tax code is so complicated it's really pays to hire somebody who spends his whole life doing this and but that's called dead weight loss by economists because they the argument is that well surely would be better off if I was working you know writing books or teaching another course or cracking rocks on a rock pile or something like that as opposed to as opposed to hunting down a tax accountant and you're working with him and so but and so this is this is put out there by the economics profession who people in the area of public finance as value-free analysis because all they're interested in is efficiency economic efficiency the economic growth increasing GDP but they always sneak in a normative assumption in there and the normative assumption is that it would be better if you had less money and the state had more money of your money that's the assumption there when you give it of tax deductions okay and of course what Rothbard said about this is you know private individuals always spend their money more efficiently than government bureaucrats do and so if you're going to call this efficiency it's it's backwards the analysis is backward it's not efficient to hand over more money to the state by tax closing tax loopholes it's less efficient in that sense and so and of course one of the things I always admired about Murray is he always smoked out the value judgments that the mainstream economists sneak in to their analysis like that under the guise of positive economic analysis and so so that's another another point point that Rothbard made and so in that sense you can look at the tax accountants as sort of heroes of society if they can help you avoid taxes you know every every penny that you deprive the state of is a good thing and so you know Adam Smith and the wealth of nations called smugglers heroes because they were they were getting around the state's protectionist tariff laws and therefore helping people to buy cheaper food and cheaper clothing and things like that well that's what tax accountants and tax lawyers are doing aren't they they're helping people get around the tax law so that they can provide for their families better you know why is that not a good thing why is that inefficient or deadweight it's socially costly it's socially beneficial it's not so socially costly to do that one of a very interesting book there was a huge hit among the Mises Institute students some years ago when it came out was for good and evil a history of taxation by Charles Adams it's proud I'm sure it's probably out there somewhere and Charles Adams was a tax lawyer his whole life and he wrote this big fat book on the history of taxation you know beginning with ancient Egypt all the way up through the modern modern days so if you've ever interested in reading an interesting book on the history of taxation in the world for good and evil is by Charles Adams I would recommend it here's another thing Rothbard said in you know in his book about the logic of action yeah one of the chapters is called the myth of tax reform and here's what he said in his word in his own words every economic activity that escapes taxes and controls is not only a blow for freedom and property rights it is also one more instance of a free flow of productive energy getting out from under parasitic repression that is why we should welcome every new tax loophole shelter credit or exemption and work not to shut them down but to expand them and to include everyone everyone else with them in the argument that well tax loopholes don't benefit everybody is usually made to say well we should get rid of them then it's unfair that not everyone benefits from tax loopholes Rothbard said well wait a minute why isn't it legitimate to say that well we need to expand them then if it's unfair that not everyone benefits from them let's expand them so that everyone does benefit from them why is that a loaded analysis or normative analysis but the first one is not and that's a good point and because the first analysis that we need to get rid of them because it's unfair again the bottom line is that you have too much money in your pocket and the bureaucrats have too little of your money in their pockets to waste Ludwig von Miesse said this at a 1952 conference he said let a I'm quoting let us be grateful for the fact that there are still such things as those honorable gentlemen calls loopholes thanks to these loopholes this country the u.s. he's talking about is still a free country and its workers are not yet reduced to the status and the distress of their Russian colleagues this was you know right after World War 2 fairly shortly after World War 2 when the income tax rates were pretty high I had a statistic here I don't want to mention that statistic right now though and so that was Miesse's on this okay another argument that mainstream economists make has to do with taxes tax deductions they go to industries tax credit for the energy industry of the oil industry or something like that and the usual argument is that well if the government reduces taxes in one industry but not all then that creates a misallocation of resources because resources will flow in more resources will flow into that industry then would go had there been a free market with no tax deductions anywhere as far as that goes and so that that's pretty much universally agreed upon by mainstream economists that this is inefficient to have tax breaks for some industries but not all it distorts markets but Rothbard is sort of a Johnny one note on this and that see yeah and that here's what he says he says what is the alternative of doing this if investment energy or other tax credits or deductions are abolished resources will not automatically go into more productive areas instead they go into government via higher taxes and will simply be wasted thrown down the rat hole of unproductive and profligate government spending so yeah if you do if you do away these tax deductions that exist for some industries but not all you have to focus also on the expenditure side of the budget that's one of the things that Rothbard did there was a superior to the a lot of the public finance economists who only look at the tax side of the budget and don't comment on well what happens to the money that is collected by these tax increases in the name of tax neutrality or economic efficiency or something that has an effect on the economy too and so once again you're transferring money from people who may we're making productive use of it in what are they doing if you give a tax deduction to a particular industry it helps them improve their ability to provide goods and services on the free market for customers then you get some of that money and you do away with the tax deduction you give it to the bureaucracy to throw as Murray said down a rat hole of the bureaucracy you know what wonderful things are they going to do with it to build more housing projects which they will blow up in 10 years that which is what they do quite a bit anymore as far as that concern okay another another aspect of the whole loophole business and in tax policy that I'll mention is I'll bring a little bit of history in this since I mentioned I started off talking about the income tax in the United States that you know there wasn't there was no income tax well there wasn't income tax during the so-called civil war I call it so-called civil war because you by the way a civil war historically meant two sides battling over control of the government and that was not the case in the American Civil War it was the British Civil War was like that but the American Civil War was Jefferson Davis did not want to run the government in Washington DC anymore than George Washington wanted to run the government in London England you know but that so it wasn't a civil war but that's what everyone calls it but that was the first income tax the Lincoln administration put in a progressive income tax during the civil war and then it was eliminated several years after the war was over and it took until 1913 but all during that time the main the main source of federal tax revenue in the US was tariffs on imports sales tax on imports basically and by the end of the American Civil War the average tariff rate average tariff rate was around 45 to 50% you know today it's more like 2% but 45 to 50% the high watermark on tariff taxation in the 19th century was 1857 when the average rate was more like 15% 15% and that was called a revenue tariff at the time because the idea was it was enough to raise just enough money to finance the constitutional functions of government a protectionist tariff is different the purpose of a protectionist tariff like a 45% average rate would be to keep imports out but the 1857 tariff was a revenue term okay so from 1862 until 1913 America had close to 50% average tariff rates you know hyper protectionism but foreign trade only accounted for less than 10% of the whole economy so it didn't devastate the whole economy but it did it did slow down you know there would have been more economic prosperity without this but the industrial revolution in America produced a lot of prosperity during that time there would have been even more had it they're not been protectionism like this but one of the consequences of this was that and it's a general rule in economics that exporters always disproportionately suffer from import tariffs and sort of a corollary of that is that attacks on imports eventually becomes attacks on exports because when you impose a tax on imports you you impoverish your trading partners if you tell the British in the French in the Dutch that we're going to put a 50% tax on the things that you import into the United States and try to sell and as a result they sell less or none they have less money they are poorer the British the French and the Dutch are poorer and now that means they have less money with which to buy American goods that's why they're trading they want to get money and they want to buy stuff from Americans what were they buying from Americans mostly agricultural products mostly agricultural products from all over America the Midwest the South you know the farmlands of America and so for decades after the American Civil War this hyper protectionist trade policy disproportionately harmed American farmers because not only did it force them to pay higher prices like everyone else did for the things that had tariffs on them clothing shoes farm tools and etc but much of their business from Europe dried up and and so the Midwestern farmers complained bitterly for decades and they were a very politically potent group in the late 19th century Midwestern farmers along with southern farmers and and they were being disproportionately harmed by the tax policy and you know the original Constitution sought to outlaw discriminatory taxation but this was really grossly discriminatory taxation it's also the exact reason why southerners complained about tariffs before the Civil War and it's also the reason why when the Republicans gained power in 1860 the first thing they did was to more than double the average tariff rate and that did have a lot to do with with the war in fact those of you who've heard my speeches on Lincoln you if you read his first inaugural address he literally threatened war over tariff collection he said it's my duty to collect the tariffs and imposts but beyond that there will be no invasion of any state so and that is literally a threat of war over tax collection in the Abraham Lincoln's first inaugural address and and so southern farmers were complaining at that time but by the time you get to the late 19th century you had all the farmers in America not only complaining but organizing politically and so it ended up they they struck a deal with Washington DC Washington DC said okay we will take the pressure off farming we will reduce tariff rates if you the farm lobby will support an income tax and so and they did so the farmers and to give you an idea of how powerful politically farmers were in the Midwest I published an article some years ago on the origins of antitrust at the state level and we did a case study of Missouri and it's Missouri to those of you from that state who mispronounced the name of your state but but I was taught in elementary school that I is not ah but they call it Missouri like it's ah and in that state but but anyway so they made this grand bargain the farmer they were they were so powerful that when I did this study if you were a school teacher in Missouri at the time but in the state legislature you identified yourself as a farmer teacher if you were a dentist you were a farmer dentist and and and so forth because you had to be associated with farmers or you're not going to have a political career in the Midwest in the in the late 19th century and so they they use all this political clout to work this deal okay well we'll go along with this very modest income tax and the first rate you know when they did adopt the income tax the first bracket was 4.4 percent and see where am I here oh no this is a it's a different table I'm sorry first bracket I think the top bracket was 5 percent top bracket and you had to make a half a million dollars and so hardly anybody paid the income tax at that time that's only millionaires tax at the time so they thought that'd be pretty good and so we got the income tax and then as soon as the income tax got in here's what happened the government played a bait-and-switch game and so 1913 was income tax and by 1922 they raised the tariff again so the tariff was dropped back down to the revenue tariff rate but by 1922 the tariff averaged 33 percent under the Fordney-McCumber tariff so the government reneged on its promise of keeping the tariff rate low for farmers and then by 1930 the average tariff rate was increased further to 59.1 percent so by 1930 you had the highest tariff rate ever and then after World War II you know the original income tax in 1913 had the top tax rate of 5 percent after World War I rather not World War II after World War I the top rate was 77% and so and then it went down after World War I but didn't go all the way back down to 5 percent and so by the time you get to 1930 you had you had very high income tax rates much higher than they originally were and the highest tariff rate ever so it was a classic bait-and- switch problem which I think should teach anybody lessons about tax reform when you watch what's going on with tax reform when they say oh eliminate the loopholes and in return we will reduce the income tax rate how can you trust politicians to keep that deal you know one no Congress today can bind the hands of a future Congress and of course government if the one thing government is constantly working at doing is picking your pocket and so it might look good now but chances are these exact same kind of thing will happen in the future that's why I'll talk about this this debt talk in the news lately about what to do about the debt ceiling all that is so just baloney because all these so-called plans are purportedly cutting spending 10 years from now which they can't do it's all ridiculous it is it's all blowing smoke and so and so that's that applies to loopholes too Ronald Reagan was snookered by this Reagan said if you go along with my plan for every for every one dollar and tax increase he said I will go along with the tax increase this was after the original 1982 tax cuts he told Congress the Democrats and Congress I will go along with a tax increase to close this deficit so-called you supposedly but for every one dollar in tax increase you have to give me three dollars in spending cuts and a Democrat said sure no bar no problem and so the and so they they raised the tax rates and in all kinds of other taxes and they got rid of the all kinds of deductions and for every one dollar and tax increase we've got three dollars in spending increases and so and so that's you know that's the way it works okay and so there's no next thing I want to do is there's a quote in in power and market on page 1149 of this version of power and market this is man economy and state and power and market together little paperback there's sort of a statement of Rothbard's basic point of view on taxes and I think it's worth reading because it's just classic Rothbard here he says if governments budget their revenues and expenditures so much criminals where a government levies taxes criminals extract their own brand of coerced levies where a government issues fraudulent or fiat money criminals may counterfeit it should be understood that proxy logically there is no difference between the nature and effects of taxation and inflation on the one hand and of robberies and counterfeiting on the other both intervene coercively in the market to benefit one set of people at the expense of another set but the government imposes its jurisdiction over a wide area and usually operates unmolested criminals on the contrary usually impose their jurisdiction on a narrow area only and generally eke out a precarious existence so it's pretty much the same that's why Friedrich Bastiat called terrorist legal plunder and then other thing other types of interventions legal plunder it's the same same basic idea and my old friend Walter Williams has a good way of explaining this he says he asks people what is the difference between my going up to you and holding a gun to your head and say give him give me your wallet okay and I get your wallet walk away you know and I don't shoot you and what's the difference between that and my going to with friends of mine going to Congress and lobbying for a protectionist tariff that causes you to spend $3,000 more on the next car you buy in each case there's $3,000 more in my pocket say I'm an automobile manufacturer there's $3,000 more in my pocket from you and we you walk away you know nothing happened nothing happens to you physically the only difference is one one's legal and one's not but it's essentially the same thing it's essentially theft you know legal theft and illegal theft is essentially the same thing and that's Rothbard's point Rothbard's one of his favorite political philosophers was John C. Calhoun and in particular this book and don't be an idiot and send me emails like I sometimes get if you by saying well I found something else Calhoun said that wasn't very nice you know how could you defend this Rothbard liked this book a lot it was a very learned book sometimes when I quote somebody for example I'll praise Microsoft for dropping the price of computer software and I'll get emails from people you know with a whole big long list of sins by Bill Gates you know how could you do this or if I write an article pointing about the true fact that John D. Rockefeller was responsible for a 40-year decline in a price of oil they'll say how could you defend Rockefeller and have all these bad things that he supposedly did but of course that's not the point the point is you know what is said in this book that he wrote you know and so I get mail like that all the time I think most people in this room are probably intelligent enough to know that but but Calhoun Murray considered him to be sort of the last of the founding fathers philosophically the American founding even though he was the of the next generation from Thomas Jefferson James Madison and these people he was philosophically in tune with them and he was every bit as bright as these people were and if you read this book you'll see why it's online and you can buy it from the Liberty Fund and in Indianapolis they have a bound copy of it a disquisition on government and and one of the things Calhoun did is he he wrote about what what's known as the libertarian class theory in this in this book and libertarian class theory goes back several hundred years it wasn't this wasn't original to Calhoun and it's different than Marxian class theory and that it doesn't have anything to do with the the laboring class being exploited by the capitalist class anything like that the two classes are net taxpayers and net tax consumers net taxpayers are people who pay more in taxes than they get in benefits from government and net tax consumers are people who get more benefits from government than they pay in taxes and and Calhoun wrote and predicted that the net tax consumers would inevitably overpower the net taxpayers in society and and they would also be very become very skilled at using the kind of language that could be used to water down or destroy constitutional constraints on government spending because there'd be too numerous maybe too numerous and the average citizen is rationally ignorant and doesn't the average taxpayer and doesn't participate as much as special interest groups do in politics and so Calhoun thought you would need something more than just a written constitution to constrain government you'd need the people themselves would have to take matters into their own hands and and decide what is and is not the constitutional and legitimate function of government you can't let the government itself enforce this constitution through its own supreme court if you do that it'll decide there are no limits to power which is of course where America is today we didn't take Calhoun's advice and that's where we ended up today but Rothbard whenever he writes about taxation he almost always starts with some sort of exposition of Calhoun's libertarian class theory here about net taxpayers and net tax consumers okay so and I would highly recommend this book too if you want it's a really classic book on political economy those of you who are familiar with the field of public choice almost everything you would learn about public choice in an undergraduate course on public choice is written in this book you know 150 years before there was such a thing as a subdiscipline of public choice now on tax incidents Rothbard is very good on the tax incidents that is who pays the tax who pays the tax is not always the same as what the government says who is supposed to pay the tax and he used an example of you know if the government you know what is the effect of the government imposing a tax on the cod fish industry well you'll have less cod fish cut less cod fishing you'll have a lower rate of return to investment in the cod fish industry and then as always he always looked at the expenditure side he thought it was not legitimate to analyze the effects of a particular tax without also asking the question of what happens to the money and his example he says well we use the money for the armaments industry you're going to have a reallocation of resources away from fishing and then toward the armaments industry that's pretty self-evident and another point that he makes here about his analysis of taxation is that all government expenditures are consumer expenditures the old whenever you hear a politician say we're going to invest in education or we're going to invest in blah blah blah blah blah blah there's no such thing as government investment and because it's these decisions are made by politicians to spend money on whatever building a post office not it's not an investment like a a business investment or a personal investment they're not they're not producing things that will produce goods and services and a revenue stream in the future that will pay off the loan that was taken out for the investment that it's current spending to buy votes essentially is that all government spending and so all government expenditure is consumer expenditure and when you hear politicians use the word investment they're lying it's not it's not it's not an investment it's a myth and you know two general effects of taxation one one effect of all taxation is that consumer sovereignty is replaced by political whim that is when when the government takes taxes out of the pockets of the people well you were spending that money on whatever it is you want to spend the money on and that's called consumer sovereignty that's you know one of the hallmarks of a capitalist economy is that the consumer is king in the in human action von Mises one I mentioned my own my earlier talks one of his one of my favorite quotes from human action is when he calls the consumers hard-hearted and callous who did not care a whim not care a wit for the the businesses that they do business with they buy things from because we'll switch on a dime if we get a better deal from somebody else and that's true and so at the heart at the heart of it taxation replaces that it's it destroys that because it takes some of your money from you that you cannot use to buy consumer goods that you want to buy you allow politicians decide how to spend that money and their whims and fancies will you know they'll build bridges to nowhere that you may have read about and dig holes and fill them up again during the Great Depression they were painting fake doors on buildings you know to get artists work to do and things like that or go bomb Libya you know that was there was there a great outcry by consumers to bomb Libya you know here take my money so you can bomb Libyans you know I've been wanting to do that for years myself but but but now that the Obama administration is on board let's let's go ahead and do it take my money bomb Libyans you know all this stuff there's there's in fact there's never any consumer demand for anything the government does hardly they just do it they just tell us this is what we are going to do and you are going to pay for it's you know there's no such thing as demonstrated preference in the public sector like there isn't in the private sector and and another point that Rothbard made is that the sort of the allocation of the income the distribution of income if you will the common phrase is severed from production that is you know nor in a market economy you know you work and you get paid so the the act of product or you run a business and you make money you get paid so there's a connection between your effort and the money you make but with taxation that doesn't exist you know you work and you don't get paid you know somebody takes the money so and they use it for totally something else has nothing to do with you generally and so and that's just that's one of the effects you can call it good or bad and so and the way Rothbard put it is taxation results in a redistribution from the from the exploited to the exploiters public employee unions for example you would call the the exploiters those are the tax consumers politicians government employees special interest groups that get benefits from from the government that's the tax-consuming class that he's referring to and the next point that I mentioned this was mentioned yesterday at the Q&A on public policy upstairs when when some of some of you have apparently been duped into thinking that Neil Boerts is a smart guy and he didn't he write the book on the flat tax or something like that and so isn't he the author of the book on the flat tax that's I think of the radio guy one of those radio guys fair tax yes that who it is they all look and sound alike to me Rush Limbaugh and Neil Boerts and they're all Mark Levin they're all screaming neocons but but this one of the fair tax well this is nothing new the fair tax but the main point the Austrians make about this is the important the really important thing from an economic perspective is how much tax the government takes from you and you know and how it takes it from you is really a minor thing but there are a lot of mainstream economists and radio goofballs like this guy who seemed to think that oh the ultimate importance is how the tax is taxed not so it's it's how much money is taken from your pocket is really a much more important thing as far as that goes as far as the so-called fair tax you know flat tax one thing it's not fair how is it fair that to pay for something you know if you make if you make twenty thousand dollars and you have a ten percent fair tax and you pay two thousand dollars in tax and then somebody else who's been working very hard for thirty years at a job it makes two hundred thousand dollars and they pay twenty thousand dollars in tax why is that fair for the same benefit the same benefit one person pays two thousand the other person pays twenty thousand that's supposed to be fair that's you can argue that that's not that's not fair that but that's the flat tax and also you know per se of a fair tax of flat tax what would be good about a ninety percent flat tax you know the guy for you let the government set the rate oh yeah it's fair everybody has the same percentage but you know but the big question is well what will a percentage be and so you know so the government can take just as much money away from you with a fair tax as an unfair tax and the unfair tax is the tax code that has loopholes like I said and so the whole basis of this argument by boards and others who advocate the so-called fair tax which is a flat tax the assumption is that loopholes are bad we need to get rid of them and and as I said you know Rothbard made a pretty compelling case as did Mises and others that this is not a good idea to get rid of these loopholes because once we get rid of those sure enough we'll have no loopholes and a high fair tax rate that's been the whole history of taxation you're not going to get a low tax rate if you get rid of loopholes okay now on tax incidents probably the biggest difference between Rothbard and the mainstream economics is on this point of taxing businesses the point of imposing taxes on businesses where because of the the Austrian view of cost and price you know price determines cost not cost the cost doesn't determine price in the Austrian view and this is similar to what mainstream economics calls derived demand the demand for inputs are derived from the demand for the output that is being sold the product the final product and so the price of the final product which would reflect consumer demand is what determines what the what the inputs are going to go for if you're if you're in the business of producing lead tennis balls and no one wants to play tennis with lead tennis balls then the fact that the price of lead tennis balls is zero will mean the price of your lead any inputs they're usually your effort will be zero you won't make any money as you know you're you're a labor as an input and so you know once you understand that you understand a Rothbard's argument that taxes on businesses cannot be passed on to to customers because the argument he makes is that that you know if businesses had the latitude to just raise prices to make more money they would already do it they don't need the excuse of attacks to raise price you know if they could raise their price and make more money they would already be doing it so you could assume that in a competitive economy businesses are already charging as much as they can you know the profit maximizing price and so the implication of this is that attacks on business is borne by one capitalists and to all input suppliers including labor and because it lowers the rate of return to whatever the business it is whether it's the farm business or the manufacturing business or the high-tech business the people who run the business and the people who work in the business the people who sell supplies to the business they will all make less money and so they're and so that's why any tax on business is a tax on labor as well this is one thing the Marxians never understood and it's one thing that a lot of people today who would never call themselves a marxian still believe in they still believe yeah let's tax the corporations you know they make too much money or you're gonna tax labor among and all input suppliers when you do that if you don't understand this so all input suppliers and owners of land if land is an input into the production of something the land that a factory is on the farm land there'll be a lower rate of return on investment in all of these things and so that's who pays business taxes another sort of controversial or different point that Rothbard makes is that a sales tax therefore a sales tax is essentially an income tax the same as an income tax because it falls on factor owners it falls on owners of the factors of production okay it's not passed on okay so it's pretty much the same thing so when you so so many conservative economists for years have written books and articles favoring a consumption tax over an income tax so what Rothbard is saying is it's the same thing the consumption tax is a form of a sales tax usually but a sales tax because of this idea because price determines cost businesses are already charging as much as they can when you impose that tax they eat it the business eats it and the and all the inputs that are used in that business eat it and they pay the tax and so you are taxing income somebody's income you're taxing the income of input suppliers landowners capitalists investors that's who you're taxing and so he would argue that it's a false distinction between a consumption tax and an income tax and so you know what are the effects of income taxation well this is not unique to Rothbard but it makes leisure look cheaper because working is less lucrative you know there's if working you know you have two things you can do with your time you can work work and not work and not work is called leisure just generally whatever it is whether you're sleeping or playing golf or whether it's leisure and so when you and we'll put a tax on income you're taxing work and you make you alter that trade-off that we all make on how many hours to work versus how many hours to do something else and you make it less profitable so to speak to work and therefore you have more leisure and that's just one effect that's you know it's sort of coerced coerced leisure you know you wouldn't you wouldn't make that choice without the income tax but you're forced into it by the income tax and of course it means every working person's standard of living declines because money is taken out of your pocket and and of course if the money is spent on you you can make the argument that it doesn't really decline because the money it comes right back to you but of course it that never does it never does totally that way because the government always keeps its share of any tax there's one argument here that you know you know people could conceivably work harder when you when you tax them or raise their income tax rates some people not maybe not every last individual but some people could respond to that by just working harder because they don't want their standard of living to decline so the government taxes me more while I work in extra 10 hours a week so that I can maintain my standard of living I don't want to have to take my my kid out of private school and put him in the public school disaster or something like that and so you can make the argument that people will do that but it's in Rothbard doesn't deny that that's possibility for some people not everyone will take more leisure and less work if you increase income tax rates but but again what that means is that coercion is being used to force you to do something you would not otherwise do and so it's not necessarily a good thing that coercion does this and also you know when income tax rates get high enough it encourages barter and encourages people to trade not with the income they earn but in kind services you know a dentist will do a teeth cleaning for me if I what give him a lecture on micro economics or something like that that's a that's a yeah I usually have a big deficit with my dentist he never never wants a lecture he always wants cash and I regard and so people in course barter is more inefficient than if you use a medium of exchange to engage in in transactions in of course higher income taxation also encourages do-it-yourself behavior if you don't have the money you know if you need a new roof you might like to hire a roofer put a new roof on your house if you had the money but if you don't have the money and you can do it yourself for half the money and because that's all the money you have well then you're gonna do more things around the house by yourself and and that'll lead to the growth of places like Home Depot where they have people teach you how to do this kind of stuff without killing yourself hopefully and you know roofing and all that but then you know what look what that does is is or disrupts the whole benefit of the division of labor you know the do-it-yourself business is a disruption of the division of labor where people specialize in this stuff and know what they're doing and whereas you know if you and I don't have the money to pay the specialist well we have to if we want a new roof then it doesn't leak we have to figure out some way to do it on our own or whatever plumbing and so forth okay you know those of you who are old enough to have ever done some of this stuff you know when you start doing this you always create more problems than you started with you know the first thing you do is to screw something up and so you have to go back to Home Depot and buy more materials of things to fix the problem that you created in trying to fix something and that's what happens when you don't hire a specialist you know yeah yeah I can do wiring I can wire the electricity in my in my house I'll just read a book and whereas you know one of my neighbors is an electrician and he had to go to school for a long time to learn how to do it without burning your house down so not a long time but he had a pretty significant training to be an electrician he can't just walk off the street and do that stuff and so and so that's what the income taxation does disrupts the division of labor and it also reduces the rate of return on savings because you know a source of income comes from savings interest income on savings and if you have to pay taxes on that it makes savings less lucrative less profitable so there'll be less savings if there's less savings in the economy there's less capital accumulation because that's a force of source of financing capital investment if there's less capital accumulation over time there'll be a lower productivity of labor and if there's a lower productivity of labor there's lower wages over time and so income taxation has a double bad effect the government takes money out of your pocket and it reduces your income in a short run in a long run it reduces the marginal productivity of labor through this savings connection and so the whole country is poorer in general because of that income growth will be slower if if labor productivity growth is slower and if you follow what Rothbard is saying about taxation then you know that the social security tax he argued is all paid by employees even though the way it's administered in the United States is the employer sends a check to the government supposedly 50% of the total tax and then the other 50% is taken out of your check and on your behalf out of your pay on your behalf the employer sends it to the Social Security Administration but but in reality since it is a tax on a business the first part of it you're going to pay that in a form of reduced wages you know you would have made a higher wage had the employer not had to pay that tax because you'll get paid to your value marginal product of labor in a competitive market but if the government imposes a tax on the employer part of what you're being paid is that tax that he pays for you and so so you and I will end up paying all of the Social Security tax or any kind of payroll tax like that and the final kind of tax I'll mention here is the corporation income tax and I'll draw a picture to show the effects of that Rothbard discusses it in plain English but since I have a PhD in economics I'll explain it in a much more complicated way that's what we're taught them taught to do in economics now see this is marginal products is what what's all these curves are marginal product this is a zero here zero this is a marginal product of corporate capital capital is used by corporations to produce goods and services this is marginal product of non-corporate capital and it's declining because of the law of diminishing returns and non-corporate capital is housing farms state and local government they have capital stock and that's what that is and so and so let's say there's no corporate income tax there's a free market and no corporation income tax and then we impose a corporation income tax okay what that is going to do is to drop this curve the marginal product of corporate capital down like that and originally let's say the rate of return originally point a was say 10 percent say the average investment uh with this level of corporate capital let's say we start there 10 percent that's the amount of corporate capital I'll call it C big C okay and so what's going to happen is now there's a tax on everything every dollar you make by investing in this corporation or any corporation and so the rate of return is going to go down to corporate capital to say five percent so all of a sudden if you invest in non-corporate capital you can make 10 percent return but if you invest in corporate capital you can make only a five percent return all of a sudden so what's what's likely to happen in terms and in the markets right investment will increase in the non-corporate sector farming and other things will be more lucrative so more money more more capital will flow in that direction okay so originally you'll have this five percent you have an arbitrage opportunity here and so you know more capital will flow in this direction in the non-corporate sector you'll move down along that line and that'll that will reduce the marginal productivity of capital because of the law of diminishing returns and so and at the same time this also means a reduction in the amount of corporate capital because you're moving up along the corporate capital marginal product curve and you'll create and so you'll have the and so if you're having less corporate capital the marginal product goes up not down if it goes up the return goes up the higher marginal product and so and so and just the opposite will happen with non-corporate capital as you have more non-corporate capital because of diminishing returns the marginal product goes down and the return goes down and some new equilibrium will be achieved at say seven percent okay so that'll that'll so the equilibrium here will move from A to B to C and so the end result is that a tax on corporate capital like the corporation income tax is a tax on all capital so all the owners of any kind of capital will will pay the tax the incidents will fall on them because there's a lower return on everything and and also anybody related anybody who works in the non-corporate sector or the corporate sector the labor it will be less lucrative because there'll be less less of return overall in the enterprise whatever the enterprise is farming home building corporations building cars whatever it is and so Rothbard explains this in in plain English but this is a and so what he has to say about this is really not different much at all if at all from the general mainstream analysis of this and this was actually this this graph is a sort of a an elementary explanation of a famous article by Arnold Harberger it was in the published in the early 1950s I think a long time on the effects of the corporation income tax that became sort of the standard analysis and economics of why it is that all capital pays the price all the owners of all types of capital pay the price of corporation income taxation as do laborers and all input suppliers in the whole economy really and of course the way the corporation income tax is administered in the United States is that first the corporation pays I mean sends a check to the government and then if they pay dividends to their stockholders you as a stockholder have to pay income tax on the dividend and usually federal income tax and state income tax and so there's double or triple taxation of corporate income you know what the corporation itself sends a check to Washington and and to state governments usually so that's two levels of taxation and then you get your dividend as a stockholder and you have to declare it as income and you'll pay federal and state income taxes in most states Florida doesn't have an income tax so not every single state in the U.S. so in a lot of places you'll pay four times on on your corporate corporate income and so it's because it's well hidden that's you know governments love to tax impose taxes that are well hidden and then and so and if the but but once again it's this sort of foils the Marxian notion that you can tax corporations for the benefit of the working class somehow no it's it harms the working class who work for the corporations if you do this and so that's and that's the final thing I wanted to say and I think we're about out of time and you're mostly you were hung over anyway from last night so maybe we'll quit two minutes early