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Statist Fallacies on Federal Taxes, Spending, and Debt


A piece in today’s New York Times shows why, under the statist paradigm in which we live, it is so difficult for America to extricate itself from the federal government’s over-spending and over-borrowing.

The article, “Beware the Fiscal Cliff” by David Firestone, suggests that there’s really no good answer to the government’s fiscal woes because drastically cutting spending will “pull money out of the economy, at a high cost,” thereby exacerbating the recession. Firestone also suggests that cutting taxes won’t solve the problem because it “would raise the deficit significantly, for years if not decades.”

Sometimes it’s possible to get so bogged down in a statist society that one misses the forest for the trees. That’s obviously the case with Firestone, and his analysis epitomizes the problematic mainstream mindset that we face in America when it comes to the federal government’s fiscal problems.

We begin with the proposition that in a genuinely free society, people are free to keep everything they earn. There is no income tax and no IRS to collect the income tax. There are no income tax returns. There are no deductions. Everyone keeps 100 percent of his earnings. It also means no welfare state and no warfare state.

That was the situation for more than a century of America’s existence.

When people are free to keep their own money, what they do with their money directs the employment of resources. If they use their money for vacations, cars, clothing, food, computers, or education, then businesses will pop up to provide those goods and services. Those are the sectors in which people will be employed — the ones that are satisfying consumer demands.

Alternatively, if people wish to save their money, the money will be deposited in banks, which then will lend it out to businesses that wish to expand or improve their operations. Thus, employment will be oriented toward those sectors that are providing financial services or that are producing capital goods.

What’s important to realize here is that when people are free to keep everything they earn, they are managing their own money, and businesses are responding to what people are doing with their money. People are deciding whether to spend their money, save it, invest it, hoard it, donate it, or whatever. Each person is using his money to pursue his own happiness as he perceives it.

Now, enter the welfare state and the warfare state. Let’s say that the government decides to impose a 50 percent tax on people’s income to establish and fund them — 25 percent for each one.

The welfare state consists of a vast array of welfare programs, such as Social Security, Medicare, Medicaid, food stamps, foreign aid, farm subsidies, education grants, and much more. The warfare state consists of an enormous military-industrial complex, an empire of foreign military bases, and a regular series of foreign invasions, occupations, and wars of aggression against other nations.

Notice what’s happened here. People no longer have the use of 100 percent of their income. They now have the use of only 50 percent of their income. They are forced to send the other half to the government. That means that they’re now only able to spend half the money they used to spend on the things that bring them happiness. That means only one-half the vacations, cars, education, food, savings, and so forth.

That, in turn, means that there will be only half the people employed in the sectors providing the goods and services that people were purchasing before the tax.

What happens to all the people who are laid off? They go to the welfare-warfare sector because the government is now spending or giving away half of everyone’s income — the half that is taken from people by the IRS. So, with all this new-found money there are now plenty of new public-sector jobs and doles that attract people over to the public sector. More soldiers. More weaponry, which means more jobs for the plane and bomb industry. More construction jobs for the military bases. More dole recipients in the welfare state.

But, as we all know, both the welfare and warfare sectors are voracious. They want more and more and more. So, taxes are raised to 60 percent and then 70 percent. But people get angry and start to revolt. The government gets the message but the welfare and warfare segments still want more and more and more. Ultimately, the amount the government is spending on welfare and warfare far exceeds the amount being collected in taxes.

Along come libertarians and point out that there is an obvious solution to this statist mess: Dismantle the welfare and warfare segments of the government and repeal the income tax, leaving people free, once again, to keep everything they earn and decide what to do with it.

What do the statists say? They say what Firestone says in his article — that that would be disastrous because it would require laying off government employees in the welfare and warfare sectors. He says that such unemployment would exacerbate the recession.

Do you see the fallacy in that type of thinking? Do you see how writers who cannot break out of the statist box in which we live end up getting all tied up in knots when they analyze America’s fiscal woes?

Of course the dismantling of the welfare and warfare sectors would displace the army of government bureaucrats in those sectors. But what statists can’t see — or refuse to see — is that all that would mean is that the people in the welfare-warfare sector would re-orient toward the sectors that would now be satisfying consumer demands from the people who now have the other half of their income to dispose of.

In other words, the dismantling of the welfare-warfare sectors would restore the situation that existed before the government imposed its 50 percent, 60 percent, and 70 percent tax on people’s income to fund the welfare-warfare state. Everyone would now, once again, be free to keep everything he earned and decide what to do with it. No longer would he have half or more of his money taken from him.

Moreover, the people in the public sector—the ones dependent on the welfare and warfare dole would now be in the private sector, which means that they would be producing goods and services that raise people’s standard of living rather than living off the dead weight of tax collections.

Thus, there would be a doubly positive economic effect—people already in the private sector would be maximizing their happiness by keeping and disposing of everything they earn, rather than just 50 percent, and people formerly in the public sector would also now be in the private sector producing goods and services that raise people’s standard of living.

Would there be short term dislocations? Of course. But it’s easy to see that those dislocations are necessary to restore a prosperous, productive society, one in which people are free to keep everything they earn and decide what to do with it. Failing to dismantle the welfare-warfare sectors out of fear of temporary dislocations is obviously ridiculous because it does nothing but ensure a permanent condition of statism, which is the root of the problem.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.