Government — even limited government — is expensive. How should we pay for it? What principles should we obey in raising revenues? What methods of taxation should we avoid altogether? These are sensible questions any modern democracy should ask — and they deserve sensible answers.
Government, after all, is not a charity, where you give because something in your heart tells you to do so. Even the most liberal of governments (and here I use the word "liberal" in the old-fashioned sense) employs some degree of coercion to raise the revenues it needs. Study the question and you'll see that every country, democracy or otherwise, has but four means for paying for its government. Tax. Borrow. Print currency. Confiscate. And every country, including our own, engages in each to a greater or lesser degree. Let's look at them in order of their degree of coercion, begininng with the most horrific.
Confiscation. Whether it's taking land from the American Indian or drafting men into the military against their will, confiscation in all its various forms — while efficient for the government in power — is reprehensible to any freedom-loving man. The use of force, whether backed up by the threat of imprisonment, or monetary fine, or loss of life, all produce the same result — violation of our natural rights. We covered this territory in essay number one. Life, liberty, and the pursuit of happiness. These are our natural rights, and no government should be able to employ force to take them away from us. Thus, confiscation — whether through a military draft or the use of eminent domain — would be contrary to a libertarian policy and should be avoided at all costs.
Print currency. From monarchies to democracies to dictatorships, governments of every stripe have sought to extract resources from their constituencies by sleight-of-hand methods that they hoped their people wouldn't notice. Printing currency is the ultimate form of confiscation, and it shows up in the economy in the form of an increased price level and a destruction of the incentive to work. Too much money chasing too few goods. We call it inflation. The essence of a free enterprise system is that the present makes a contract with the future, and both depend on stable prices. Without it, future plans are shelved, savings are delayed, and current consumption soars. Production falters. Living standards drop. The middle class is wiped out, and perhaps the government is overthrown. Nazi Germany. Communist China. Rome, just before the Fall. Besides out and out totalitarianism, the biggest enemy to liberty is a mismanaged money supply.
Borrowing. It is possible and indeed quite healthy for a government to borrow to pay some of its bills. A balanced budget amendment is silly, and in any case, unenforceable. The question isn't whether a growing enterprise — be it a nation or a corporation or a household — should borrow money, the question is for what, and how much. To borrow money to pay ordinary, current expenses is suicide. But to borrow money to complete a long-term project, like a road, or in an emergency, like a war, makes good common sense. We get thirty years use out of an aircraft carrier; we can safely borrow money for that. But we certainly can't borrow money to pay its crew. For that we need a steady stream of income; for that we need to collect taxes.
Taxation. Over the last half-century, the Republicrats have figured out every imaginable way to tax our modern economy, some progressive, some regressive, some flat-rate. There are income taxes, sales taxes, wealth taxes, profit taxes of every stripe, tariffs, luxury taxes, sin taxes, death taxes, etc., etc., etc. Nearly every tax is designed to influence behavior, discouraging cigarette consumption for instance, or the purchase of high-priced boats. And even those taxes that aren't designed to influence behavior end up doing so anyway. Clearly, taxes have to be cut, but which ones, and which ones first?
Let us begin with one simple principle: there will be less of whatever you tax. Certainly it takes no genius to see that if you tax sales, there will be less purchases. If you tax wealth, there will be less savings. If you tax income, there will be less employment. The question we have to ask ourselves is, what is it that we desperately want and need more of? Because whatever that is, we must avoid taxing it altogether.
Now I want to go out a little bit on a limb here and argue that above all else, what we need more of is capital. For with it, the pie grows. And as the pie grows, so does everything else — income, savings, employment, and by golly, government revenues as well. Thus, it only makes good sense that all taxes on capital must go first — capital-gains taxes, inheritance taxes, taxes on dividends paid by corporations, taxes on corporate profits, right down the line. Eliminate these first, then go after income taxes, reducing them to a level not seen in nearly 100 years.
This will be the subject of my next two essays. But before I close, I can already hear the complaints — Oh, you just want to reduce taxes for the rich, 'cause they got all the capital. If that's what you think, you haven't been paying attention. We have two textbook examples of cutting high marginal rates in the twentieth century — the Kennedy round of tax cuts in the 1960s and the Reagan round of tax cuts in the 1980s. In both instances, the lower marginal rates led to the rich paying a higher share of Federal taxes than they did before the cuts, and more importantly, the economy spurted ahead both times, providing millions of jobs to people who had been out of work. Like I said, we've got to grow the pie.