Published in the Laissez Faire City Times, April 30, 2001
You have paid "your" taxes for this year, but the damage they do continues.
In his Lectures on Jurisprudence, Adam Smith wrote: "No doubt the raising of a very exorbitant tax, as the raising as much in peace as in war, of the half or even the fifth of the wealth of the nation, would, as well as any gross abuse of power, justify resistance in the people."
Two and a half centuries later, in most Western countries, tax revenues are well over the fifth, and often around half, of people's incomes. Government revenues reach 44 percent of GDP (gross domestic product) in Canada, 49 percent in France, more than 60 percent in Sweden. Even in the U.S., where government take is among the lowest of developed countries, total government receipts stand at 33 percent of GDP (in 1997), up from 26 percent in 1960, 12 percent in 1920, and less than 8 percent before 1913. Where is the resistance of the people?
The underground economy is one form of peaceful, non-political resistance, which can be conceived as a built-in restraint on what Public Choice economists call the Tax Leviathan. Yet, resistance remains limited, if only because much of the monitoring, surveillance and regulation by the state is aimed at preventing individuals from hiding income.
Another reason why there is so little resistance is that most government revenues (between two-thirds and three-fourths, by standard measures) are redistributed, as opposed to being consumed by politicians and bureaucrats. In the U.S., as in other Western countries, the growth in government revenues has served to finance redistributive programs -- i.e., cash subsidies and transfers, as well as health and education programs (see Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective, Cambridge University Press, 2000). From 1960 to the mid-90s, these expenditures grew from 12 percent to 25 percent of U.S. GDP, which explains the increase in government expenditures over that period.
Fiscal Churning
A related reason is that many people are, or believe they are, on the receiving end of the redistributive process. It is often difficult, if not impossible, to know who is a net taxpayer and who is a net tax consumer because most people both pay taxes and receive transfers or other favors from the state. The overlap is called "fiscal churning," and is approximately measured as the proportion of incomes taken in taxes and paid in transfers to the same persons. It amounts to 9 percent of incomes in the U.S., which is half the average in the OECD (Organization for Economic Cooperation and Development) zone, but still means that government expenditures in this country could be reduced from 33 percent to 24 percent of GDP without making anybody worse off. Actually, reducing fiscal churning would make some people better off. For the system is inefficient not only because most of the money redistributed does not actually go to the poor, but also because the taxes necessary to finance it create major disincentives and economic losses.
The growth of government revenues and expenditures in the 20th century may be sufficient to explain many economic problems -- as would have guessed virtually any economist who, at the beginning of the century, would have been told that the economic burden of the state would increase fourfold. In 1888, French economist Paul Leroy-Beaulieu argued that, at about 12 percent of national income, government revenues were already a threat to prosperity and liberty. Even John Maynard Keynes, 40 years later, believed that 25 percent would be the maximum tolerable share of government in the economy.
Another aspect of the perverse system that we are financing is that it feeds the growth of state power. Nobel prizewinner Friedrich Hayek had forecasted this in his 1944 book The Road to Serfdom. On the other side of the political spectrum, political scientist Bertrand de Jouvenel perceptibly wrote: "The more one considers the matter, the clearer it becomes that redistribution is in effect far less a redistribution of free income from the richer to the poorer, as we imagined, than a redistribution of power from the individual to the State." (The Ethics of Redistribution, Cambridge University Press, 1952, newly re-edited by Liberty Fund)
The Sedentary Bandit
The very process of collecting taxes a third or a half of people's incomes cannot but lead to what Adam Smith wrote in The Wealth of Nations about taxes on income: "An inquisition into every man's private circumstances, and an inquisition which, in order to accommodate the tax to them, watched over all the fluctuations of his fortune, would be a source of such continual and endless vexation as no people could support." The surveillance of financial transactions under the excuse of controlling money laundering and, more generally, the steadily increasing powers of the tax collectors are the marks of a Tax Leviathan gone wild.
The absence of resistance is also explained by the belief of most people that, everything considered, we still get some net value for "our" taxes. There lies the gist of the contemporary economic justification of the state: by maintaining peace, the state makes possible such a creation of wealth and such an improvement in human life (which would otherwise be, in the famous Hobbesian description, "nasty, brutish and short") that whatever it leaves us still amounts to much more that we would have without it. In the terminology of Mancur Olson, the state as a "sedentary bandit" exploits us less than the "roving bandits" that its monopoly of force replaces. (See Martin C. McGuire and Mancur Olson, "The Economics of Autocracy and Majority Rule: The Invisible Hand and the Use of Force," Journal of Economic Literature, Vol. 34, March 1996, pp. 72-96) But even if this is true, it does not follow that the state should get away with keeping so much of the benefits generated by its existence. The Western idea of liberty was predicated on restraining the state, and making it a servant of the people.
Taxes are not only used to produce goods and services that some people want -- namely protection and redistribution. More and more, they have been used to monitor and minutely regulate individual lives. In his Democracy in America, of which the second volume was concerned with all future democratic regimes, Alexis de Tocqueville forecasted that the administrative tyranny would "[cover] the surface of society with a net-work of small complicated rules, minute and uniform." In the U.S., administrative tyranny is represented by such acronyms as SEC, DEA, FDA, EPA, ATF, FTC, etc. An important part of the taxes we are forced to pay actually produce "bads," not goods, at least for the invisible minority of individuals who want to be left peacefully alone -- i.e., libertarians.
The higher the taxes, the more perverse is the system they serve to finance. Fifty or a hundred years ago, it made some sense to claim that the majority of people in the West consented to what were (relatively) reasonable government taxes and limited government expenditures. This is not the case anymore. A number -- and perhaps a growing number -- of people are paying taxes only because they think it is too risky to revolt.