 Good morning and welcome to everyone in attendance and viewing online If you are viewing online you can post a question on the Mises Academy page by registering and it's free to register and Unhappy tax day to everyone Let me introduce the program for today. I'll be giving the first talk. I'm Joe Salerno I'm the vice president of academic affairs for the Mises Institute And I'll be talking on the myth of a fair tax after me Matthew McCaffrey who's a doctoral candidate in economics at the University of Angers we'll be talking about taxes and the black hole of government spending and Daniel Sanchez our editor of the Mises website will be talking about taxes and history after that there'll be a discussion in which you can pose questions and We'll go from there So my talk is entitled the myth of the fair tax and you could substitute for that the myth of the just tax those those those those words aren't exactly interchangeable, but they're used that way for for for centuries people economists argued about What the just price was what was the correct price? What was the price that you could be considered just? Finally in the late Middle Ages This actually led to the development of economics. Okay, the attempt to answer this question and Interestingly enough the answer that that was finally settled upon by almost everyone in the economics discipline Was that the the just price was simply that the price that was agreed upon on the market the market price The reason being that it was voluntarily agreed upon and therefore benefited both parties made both parties better off from their own point of view Unfortunately today Well, actually let me let me just say a little bit more about that We can look at it from the point of view of buyers and sellers for a moment Every exchange and every exchange that the buyer always values what he or she receives more than the price paid So for example, if I purchased this from a vending machine for $2 That indicates that demonstrates that I prefer the water to the $2 given up and on the other hand the seller always Values the money price Received that is a $2 in this case a vending machine company to the water that they're giving up So both parties give up something that they value less for something they value more Okay, so and that applies to everything not just a bottle of water But if you pay a $599 for an iPad or $30,000 for a car it Demonstrates that you as a buyer expect to benefit expect to improve your welfare by giving up The price and getting something that you consider subjectively more valuable And on the other hand on the market People who don't value a good as much as the price are not forced to exchange So if you stood by a vending machine where they were selling soda and water You would see some people making the purchase and other people just walking by Those people aren't forced to buy because they believe that the the $2 is more valuable to them in some other use than the water Okay, so that's sort of a capsule summary of what the just price is now What about the just tax that economists are still arguing about today? Okay, there's still no settled Principle of what a just of how you determine if a tax is just okay economists are still at odds with one another And I suggest that there's a reason for this and Austrian economists in general point this out All taxation involves coerced exchange That is you're forced to give up the the money in this case the tax For a good whether or not you value the good more than the money And by the very fact that you're you're forced that is there's a threat of force In the US for example, if you don't pay your taxes Your your income will be Forcibly garnished your assets will be see will be seized and if you continue to resist you could ultimately be be shot Okay, the SWAT team will surround your house and and drag you out and if you resist It could it could could involve, you know fatal force against you So the presumption then obviously is that people for the most part value their the tax money more than the goods They're getting they don't value the government public schools as much as the let's say five thousand dollars in property taxes that they're paying for it But there's something else it's important before we can judge the justice of taxation and that is it always involves distribution of income and wealth because it always involves taking the money from the tax payers and Someone has to receive those monies or those revenues the revenues are received by the government politicians bureaucrats and Those in society who receive government very lucrative government contracts or are subsidized by government for example agribusiness involved in producing ethanol large defense contractors Banks that are bailed out using these funds welfare recipients people building stadiums rich investors in Sports teams who have public stadiums built for them and so on and on and on Okay, so those people are the net tax consumers. They don't pay taxes. They receive the tax monies So so there are some people who benefit who benefit from taxes, but other people are necessarily made worse off Unfortunately, most economists overlook this distinction Okay, and they just say well, you know, we want we want to find the tax that's more or less Is consistent with the market doesn't disturb the marketplace and we call that a neutral tax It allows people to do the same things they would have done without the tax Well, obviously they have less money to begin with so they can't do everything that they would have done So that that's the first problem But so what happens is they don't focus on the exchange itself Whether it's voluntary or coercive and everything that follows from those two different ways of obtaining money Remember there's only two ways of obtaining money in society either through production and voluntary exchange Which benefits both parties or through the political means which is through force which makes some parties worse off Even if you build a charitable hospital, okay with tax funds It still makes the person who's forced to give those tax funds worse off despite the fact that the intentions Are good, let's say, okay That's not being built for political reasons, but it's being built to really help other people on the other hand if a charitable Hospital is set up through donations through voluntary donations Well, then the giver improves his or her welfare. Otherwise, they would not have made the donation As well as the people receiving the charity, okay So what have economists done? to try to find a sort of a principle of a just tax What they focused on is the fair distribution of the tax burden Notice the word burden right there to tell you that this has nothing to do with the market in the market No exchange involves a burden it involves costs a Cost is something you give up that you value less to get something that you value more But there's always the net benefit. Okay, there's not a burden But people do treat taxes as burdens as they should and economists recognize this Okay, so by focusing on on this fair distribution What happens is that you ignore the coercion involved in taxation and the fact that the tax consumers are not Burdened with taxes in other words the politicians bureaucrats and those who are subsidized by the tax money They don't bear any burden. They're the tax consumers They're they're consuming the fruits of other people's burdensome taxes So those two things are left out of account and by the way Even if a bureaucrat files a tax return, let's say for a hundred thousand dollars And and pays twenty thousand dollars in taxes. That's that's an accounting fiction The bureaucrat ultimately receives eighty thousand dollars in in tax revenues. Okay, he doesn't pay taxes He consumes taxes in fact That adds to the burden on taxpayers because you have to go through the resources are used up that that Involve him sending in the taxes You know carrying through with this fiction sending in the tax monies and so on and having the IRS then processes forms and so on so Even we have to pay even more for this fiction Now the UN for example if you work for the UN, you don't you don't pay any taxes on your income Obviously that money comes from the country's Taxpayers, okay, and I think that might be true of the IMF to the International Monetary Fund Okay, it would be much more honest and genuine if politicians and bureaucrats just received the money that that they were going to receive in in in net payment Okay, they do not pay taxes. Okay, they consume taxes Now every economist Who who deals with it with taxes? All agrees with one principle, okay Whatever principle of ultimate principle of justice of taxation they hold they all agree that everyone should be treated equally There should be equality of treatment and sometimes called uniformity of treatment what that means is Everyone should be taxed in accordance with if you believe in the ability to pay principle his ability to pay Or if you believe in the benefits that he receives people should pay in proportion to the benefits they receive then Everyone who receives the same benefits should pay the same amount everyone who has the same ability to pay if that's your criterion Pays the same amount Or if you believe that everyone should pay proportionally to their income the same percentage then everyone in the same income class pays the same amount Okay, everyone accepts this it sounds fair on on the surface Superficially, but of course it's not at all because think about it. Let's say everyone is enslaved Right everyone is treated equally by the master, but the master occasionally will release one slave, okay? Well, I mean They're not people aren't being treated equally or maybe he'll allow the slave to work part-time for himself and only be half-time enslaved So 50% slave well should the other slaves all get together and say well, this is this is terrible This is you know, he's being he's he's he's has a slavery loophole. He has a special exemption. That's ridiculous It's unjust the point is slavery is unjust So who cares how the burdens of slavery are distributed okay, or another example is In the old days and maybe even today in some of the bigger cities where the mafia operated They would operate a protection racket where every store would have to pay in the neighborhood would have to pay them a certain amount Not to have their windows broken or their their store set on fire And they would actually the mafia would prevent crime from occurring that is from other criminals Okay, and and and peace would reign in the neighborhood, but everyone would be forced to pay that four hundred dollars Well, what if the local pizza place and the bar and and? the the Social clubs and so on where the the the mobsters hung out What if they were given an exemption they only had to pay two hundred dollars a month, okay? You say with the the mob's favorite hangouts, okay? Do we suddenly say this is not fair they should pay four hundred dollars to of course not you're reducing Injustice, okay? You should be calling for exemption of everyone from from the whole four hundred dollars because it's a coerced exchange, okay? So It doesn't it's not it's it's not clear that everyone should share the burden Okay, in fact, it's quite the opposite people if it's a burden. Why would people want to get involved in that kind of an exchange? That is the forced exchange so all this talk that we hear today of People who are exempted from taxes, you know having these loopholes that they they sneak through or being subsidy subsidized Okay, not taxing someone is not necessarily not subsidizing them Okay, a subsidy from government involves taking money from one side of the room for example And then paying it to the other side of the room, okay? An exemption is someone on this side of the room is simply allowed not not to pay me I'll just take the other four people there and take their money and pay this side of the room Okay, that person should be blamed for a loophole. In fact Mises had a very good Quote on this he said a Ludwig von Mises the great Austrian economist and teacher of Murray Rothbard He said what is a loophole if the law does not punish a definite action or tax or tax a definite thing This is not a loophole. It is simply the law The income tax exemptions in our income tax are not loopholes Thanks to these loopholes this country is still a free country and that was written in the 1950s early 50s, okay? so To conclude about this principle Uniformity or or equality of treatment in taxation is a self-contradiction. It's impossible to bring about the real world And one of the reasons is because the very act of taxation Creates two classes one class is the taxpayers the other class are those who receive the tax monies The monies have to go somewhere the tax consumers. They are not burdened They live off the fruits of of the tax burden that is in place on other people So so at least they are not treated equally, okay? On all and the second reason why this you can never realize this is because The tax as we'll see in a moment is never ultimately paid by the people who are initially taxed The taxes is what's called imputed to others in society, okay? The burden is pushed in different directions and sometimes it's very difficult to figure out who's actually paying the tax Let me give you a great example of this There was a luxury tax that was passed in 1990 by the first president Bush and a Democratic Congress Congress. This is the same president Bush who said read my lips no new taxes So this luxury tax which was passed in January 1990 would place a 10% tax on all yachts That costs more than a hundred thousand dollars. So on all luxury boats That had a price more than a hundred thousand dollars and also on all airplanes whose price exceeded two hundred and fifty thousand dollars The aim of the tax was to raise revenue From millionaires and billionaires. That's how it was was Framed that we you know we're gonna use this tax to make the millionaires and billionaires pay their fair share Okay, because they assume those are the people that purchased these items. Okay, so you're gonna make the rich pay um So for example under the focus on the luxury boat tax Or rather the yeah luxury boat tax. So a yacht selling for three hundred thousand dollars You would tax the two hundred thousand dollars above the one hundred thousand you tax that at a ten percent So that person would have to pay twenty thousand dollars But what wasn't counted on is that wealthy people have a lot of opportunities to spend their money on many many different things Okay, they can easily substitute expensive art European vacations larger mansions Okay for the purchase of a yacht and in fact, that's exactly what they did. So then They bought very few yachts as I'll show you all right So let me so people who are very different from the millionaires and billionaires actually wound up paying this tax First of all the employment in the boat building industry was 600,000 people in 1988 it fell to 400,000 in 1992 now not all of that loss of the 33% loss of jobs was due to the tax because we also had a recession in 1990-91, okay, but at least 25,000 jobs and maybe more than that According to official government studies were lost because of the tax. Okay And in 1991 the sales of luxury boats fell by 70% from the 1990 level. So they just Just collapsed Okay But overall boat sales now this includes boats that are less than a hundred thousand dollars fell only 16% so the tax definitely Put a damper on the the the yacht or luxury boat market From 1989 to 1992 boat sales fell from 42% from 17 billion dollars to 10 billion dollars Okay, now I come from New Jersey and I remember a lot of articles on this and I went back and looked them up New Jersey is one of the largest producers of yachts And it devastated the luxury boat business. Let me just give you three sort of micro examples three firms that suffered There was a Viking yacht company cut its workforce from 800 to 150 And closed down a facility. It also owned something in Tampa, Florida closed down a facility in Tampa, Florida Which caused another 800 workers to lose their jobs the egg harbor yacht company Which is the oldest boatyard in New Jersey shut down completely and laid off 250 workers Okay, it used to build 120 yachts per year Finally ocean yachts had sales of 60 million per year in 1988 It was a new up-and-coming business And it would build 12 boats a month Okay, but by 1992 the plant was closed and the workforce was cut from 325 to 55 And really mentioned Maryland is another state with a large maritime industry about 300 of the 1500 So 20% of the boat related businesses in Maryland closed down again Part of it was due to the recession, but a lot of it was due to the luxury tax Okay, so who paid the luxury tax Very few millionaires and billionaires bought boats. Okay, there were some that still bought the boat So they had to pay a partially higher and prices came down So prices came down. So so let's say the price comes down by $10,000 So instead of paying $300,000 This is $20,000 tax on there. You would think that well according to most people or the way most people think that the Seller passes the tax on to the buyer so that the person would have to pay 320,000 But boat prices fell so if the let's say the boat price fell to $285,000 and then with the 25 $20,000 in tax The the the millionaire wound up paying only $5,000 because the overall the boat cost was sold to him for 305,000 because the demand for boats fell so much their prices fell so part of the tax Even if it was sold was bore was was was born by the the boat sellers themselves So who paid paid most of the tax the small entrepreneurs when who own these companies Okay, they're capital in some cases disappeared and other cases was tremendously shrunk in tremendously shrunken value and tens of thousands of skilled workers who lost their jobs and incomes and did find jobs But lower paying jobs that did not use their higher valued skills Okay, so the people in the boat business in the luxury boat business were the ones that paid most of the tax We're burdened by most of the tax, but since so few boats were sold The government raised very little revenue much less than it thought so it so so Not only do we not know who ultimately pays any tax? Okay, economists can figure it out I mean you can figure out the groups that are that ultimately wind up paying a tax and it's not the groups that are initially taxed Okay, but secondly, you know it devastated a Sector of the economy. Okay, the powered attacks is the power to destroy fortunately, I mean the the the boat Industry was on the way to just completely collapsing Clinton president Clinton finally repeal the tax in 1993 and and then the the sector began to Deflourish again, okay Okay, so how do so let's talk about the underlying principles very briefly How how do economists? Justify these coercive taxes. Okay, these taxes that supposedly even though they involve coercion Duplicate the market that is they're just like the market according to these economists one is called the ability to pay principle People should pay taxes according to their ability to pay. It's very very ambiguous. There's no clear clear standard about Someone's ability to pay. Let me give you an example. Let's say two people both earn $50,000 per year a and b a has no savings Okay, be who owns the same income has $200,000 in his 401k a is in perfect health B has $20,000 of medical bills every year a has no children B has five five children Okay Who has a greater ability to pay? B has more wealth is $200,000, but he has higher medical bills and he has five children There's no way there's no unit to measure people's ability to pay. It's an absurd standard Okay, yet economists uphold this one way they try to to Justify it by saying well When people give money to their churches or to the Red Cross or to the food banks or charities They're expected to give in according to their means. Okay, you're told by by your pastor your priest to give what your means allow And according to these economists, well, that's the same thing with government, right? It's a common organization We should all give what our means allow However, the pastor or priest doesn't come to your house if you don't give 10% of your income and Hold the gun to your head. Okay, the government does there's no way to resign from the government There's no way not to get out of that organization. Okay, whereas all the other organizations you can get out of But also why do people voluntarily contribute to charity because they're able to of course not Because they believe they're receiving a benefit by being charitable So people pay according to benefit According according to the benefits that they expect to receive From gifts not according to their ability to pay Okay Many people will contribute to certain types of charities for for for moral reasons Okay, so even if they have the means they don't expect to get a benefit from it. Okay Finally market price is very important market prices obey the law of one price, right? Everyone regardless of wealth and income pays the same amount of money for loaf of bread for an iPad For steak dinner for cell phone Okay, the rich don't pay more or people with a greater ability to pay don't pay more Imagine if everybody had to pay a price in proportion to their income So then someone who was ten times richer than someone else would have to pay not twenty dollars for steak dinner But a hundred dollars everybody would have to pay according to the proportion of or Higher price according to how much higher their income was in the average let's say and There would be no reason then for people to work harder to invest more and to be and to acquire money income if Everybody had to pay according to their income There would it would in effect equalize everybody's income Okay, and so they're therefore there'll be no reason to try to try to work hard for money income and the economy will collapse So it's a ridiculous and absurd principle that leads to The collapse of the market economy so it's certainly not neutral to the market if it destroys the market this ability It's ridiculous ability to pay principle So how could that that be neutral to the market? Let me just talk briefly about the last principle. There's a few others But these are two of the big ones the benefit principle, okay? So that the tax is supposed to be levied according to the benefits that people receive from society, okay? Number of things wrong with this right off the bat Immediately benefits are equated with money. So if a earns more than B, then he receives more benefits from society, okay? Well, let's put that aside for a moment There's a couple of things wrong with that a Earns more than being a market economy because a has provided a Goods that are of greater value to consumers than B has that's why a earns more So in some sense if you want to use this terminology a is giving back more to society already by his productive Efforts and it's simply getting paid in proportion to how productive he or she is and Secondly society is not government Okay, everybody participates Freely in society when they go to work when they exchange goods and services, okay? That's not true of government and government is not society government is a tax consumers not the taxpayers and Also on the market people do not pay according to benefit Received, okay, they don't pay according to ability nor ability to pay nor according to benefit receive Let me give you an example Let's say a is willing to pay up to two hundred dollars to see a rock concert Okay, you really love this band B was willing to pay up to sixty dollars. Okay, do they pay different prices? No, they both pay the market price of fifty dollars each one values a ticket Either you know more than Then then the money they're giving up, okay? It's true a would give up to two hundred dollars and B would give up to sixty dollars for a ticket But that's not that's not relevant. Okay market price is uniform for everyone Okay The other point is that market exchanges because they're voluntary demonstrates benefit, okay? It shows that everyone is benefiting whereas And by the way, it also shows the fact of the benefit, okay? So it shows the fact of the benefit and and but it does not measure it Okay, it doesn't measure the benefit. Okay, that's subjective how much people benefit from things. We just know that they do benefit But on the other hand taxes because they're not voluntary do not demonstrate any sort of a benefit Okay, the presumption is all the other way, right? If there's this threat of force that if you don't pay your taxes You could be coerced well then in fact we assume that the person actually would not have paid the taxes unless this threat existed And finally I might say that tax consumers benefit From the tax revenues they receive But they don't pay according to the benefit if they if this principle was applied to all government officials and the people who receive subsidies They'd have to give back all of their salaries Okay, that's the report. That's the benefits that they get So in conclusion what I want to say is there is no just tax, okay? The closest you could get to a neutral tax So even here it's not neutral is everybody pays exactly the same price for government services rich and poor like we all pay a couple hundred Bucks to the federal government or whatever But that would have to be a very very low tax Because very poor people couldn't pay very much which would be great Okay, so it'd be very very low tax, but it's still not neutral to the market Okay, because some people don't believe that government schools are worth even a penny I don't government public schools or police protection or and so on So the only way to really to provide defense and courts and other public services that are Now provided by government. Okay, if you want to be one way of doing it That is neutral to the market is simply to allow the market to provide these defense services and courts. Okay That is just to have just prices