Taxes and the Black Hole of Government Spending

0:00What I would like to do with my time is to just discuss a few more of these economic aspects of taxation because in addition to being unjust, taxes are also very destructive from an economic perspective and it also happens, as I think Dr. Salerno was kind of indicating, that it's often economics that is used as a primary justification for taxation and so for that reason we need to examine some of these ideas people have about how taxes and government and Spending Work. So, just in general, you can say that taxes are destructive on a couple of different levels. The first, perhaps most obvious one is that when government taxes money from productive members of society, like entrepreneurs, it prevents them from doing what they do, which is provide people with goods and services that improve their lives.

0:54This is the most obvious effect, I think. This is what happens to everyone on tax day, in a way, when you really see what you're paying to the government and when you really get a clear idea of what you could be doing with your money, if only you were allowed to keep it. And it's not hard to see how your life could have been improved with the money that you're paying. So this is bad enough, but in addition to that, there's a second kind of destruction that I want to focus on that happens when the government then takes your money, that it is taxed and spends it on its own programs, because then you have an additional series of problems that arise, especially relating to government waste and bureaucracy and things like that, cases where at best they're simply throwing your money away and at worst they're actually spending on things that actively destroy people's well-being.

1:48So I mean, you know what a black hole is, I assume, it's this region of space-time A time that's so dense, every bit of mass is so much going on, that gravity prevents anything from escaping, not even light, and that's what government spending is, a black hole, and so that's just kind of my general theme today. So let's just think for a minute about the justification for taxes and government spending, because of course government doesn't just keep our money in a vault somewhere, and in fact in some ways that would actually be an improvement, but no, they have lots and lots of ideas about how to spend it. And it's that spending that is often used to justify taxation. There's an idea out there that although we don't always like them, taxes are generally okay. Because, you know, they're not just costs to us. The government goes out and spends that money on things that benefit us as well.

2:39So sure, taxes aren't great. They're unfair sometimes. But they're important and necessary because the government needs that money to provide us with some essentials, public services. This is the universal defense of taxation. So what I want to do today is just explain a couple of different ways this idea is flawed. And basically, I just want to try to convey the idea that government spending is really not benefiting us, even when it's for these services that we are told are absolutely vital. Now, you could talk forever about what government spends money on, but I'll just stick to a couple of different ideas that tend to come up in these discussions. The first thing I want to point out is that we should be suspicious about government spending just from the start because if the whole rationale for taxes is that we need government spending to provide us with some vital services then we are entitled to ask, well, why aren't we just spending our own money to produce those same services ourselves?

3:38Why do we need this government middleman to step in and collect everyone's money and then make all the decisions about what gets produced and how and who gets the results. And of course the answer is that, of course, government is not spending our money on the goods and services that we actually want, or at least not in the way that we want them. A point that Murray Rothbard would like to make is just that the simple fact that government has to threaten us with imprisonment to make us pay our taxes shows that they don't really want to use our money for the same things that we do. So this is a basic point. Now, of course, there's a very common response to this, which is simply to say, well, you know, without a centralized power to tax and spend, people couldn't be convinced to provide so-called public goods. Things like roads. The idea is that we could never get together and make a road without government taxes and spending. So when we tax you for projects, for, you know, these projects, you really are benefiting, but maybe you just don't appreciate it.

4:42and I appreciate these gifts that the government is giving you and this to me is sort of extremely condescending reply to think that you know without Uncle Sam to show us we would never think of making a road or we would never be able to figure out how that process works the idea seems to be that despite the fact that roads are these vital tools that we use every day without a government to design and build them we'd just be at a total loss no one would be able to talk to anybody else In general, it's highly questionable whether these services need to be provided by government. Everyone would just be standing on his own little plot of land, helpless to move anywhere, because up to that point, no one has arrived yet with a gun to say, give me 30% of your income so I can figure out a way for you to leave your front lawn.

5:31That's the basic argument that people seem to think of. So just in general, it's highly questionable whether these services need to be provided by government, and thus whether we need to be taxed for them. And this is of course what kind of Dr. Salerno was talking about at the end, you know, there are some very basic services that the market can provide, that the government doesn't need to provide, but that people have traditionally believed must be restricted to government and the roads are one of these, but even if the government is spending our money in the way we want, taxation and spending still actually wouldn't be a particularly good alternative to just doing the work ourselves Because remember of course it costs money to maintain the government. In order to collect taxes and then spend them, government has to create an enormous bureaucracy to manage the whole system and that imposes a huge additional cost on the taxpayers that goes far beyond the production of these basic services.

6:32So just in any case I think it's useful to spend some time on the idea of essential services and how government compares to the market in that regard. As I mentioned already, the classic case of taxation and government spending is the roads. Whenever you criticize taxes and spending, the first question people always ask is, but who will build the roads? If we don't pay our taxes, no one will maintain the roads. How will society function? And I like to sort of turn this example around on people and just point to any average public road and say, well, yes, you're right. Who would build those roads? These roads that are expensive and always more expensive The roads that are constantly in disrepair, always under construction, these roads that always seem to require an increase in our taxes to maintain, it's a good question, who would build those roads?

7:24And the answer is, if taxes didn't fund them, nobody would build those roads. What would happen is that entrepreneurs would find creative and innovative ways to build roads that actually do what they're designed to do, to Do, which is safely facilitate travel at a minimal cost to the public. But the public way of approaching this problem, because the government lacks the motivation of the market, is to simply spend money without much motivation to be careful or efficient. And instead of benefiting the general public, their goals are much narrower, usually to to provide a livelihood for friends of theirs, people like construction firms who have friends on the local city council, or property developers who own the land that the roads will be built on.

8:17If you want to see this market versus government principle at work, just go to a private drive in a gated community, or more importantly, the typical parking lot of a privately owned store. You can see anywhere near the disrepair or costliness or experience the inconvenience that you do on the typical public road. And the reason for that is obvious. It's because the private business owners are trying to attract people. They're trying to win customers. And they can't do that if people can't get into the store because the parking lot has been under construction for six months. Which is what happens on the public roads. But the basic point I'm trying to raise is that taxes are usually justified based on the idea that the government has to provide this kind of service.

9:03But then the government can barely even do that. So even in the very basic case of roads that we're told couldn't possibly be arranged among private individuals, the government's not really using tax money to benefit society. What they do is use things like the roads as an excuse to expand their budgets and enrich their friends. There's a libertarian writer, Isaac Morehouse, who came up with a great version of this whole question. He asks, without governments, who would bilk the roads? And that's a much more honest version of this question. question but but the takeaway from this discussion is that you know we have to be careful not to be naive about these these fundamental benefits that government is supposed to be using our taxes for because even when they're used for for the things that we all take advantage of they're still not as as safe or or useful or efficient or cheap or practical as the alternatives that the market can provide in fact it can be very even difficult to even imagine

10:07The idea of what is seen and what is unseen, what is seen in this case are the government programs, the roads, the schools, and so on, and people find it hard to imagine what the alternatives might look like, although, of course, they all have very old historical precedents, and so on, and people find it hard to imagine what the alternatives might look like, although of course they all have very old historical precedents, but because they've been pushed out of the market now, the alternatives remain unseen, and so in most people's minds, they must therefore be impossible. In any case, they're very difficult to imagine. Now, the idea of choosing alternatives to the government's taxing and spending is interesting because it highlights the fundamental difference between the services the market provides and the ones government provides, because if the market provides you with a service that you don't like, you just stop buying.

11:08Maybe you even demand your money back, but of course, you can't choose not to pay your taxes. And because we have no choice but to pay our taxes, government doesn't really have to rely on providing quality services. Its revenue is guaranteed, no matter how well or poorly it performs. And as I'm sure you can figure out, this doesn't result in a lot of efforts to satisfy the taxpayers. And it means there's no real push to pay taxes. And so the results are predictable and universal, namely, government spending results in waste and the destruction of valuable resources.

11:58But then there's an added twist to this as well, because since the government squanders so much money, that prevents them from paying for everything that they originally planned. and from completing the projects that they're supposed to be using the tax money for. So they're always coming up short due to their own waste. But then they twist this to their own advantage and they say, well, look, this just means that our budget is too small. We still have all these other projects that we need to pay for that we can't afford. So they then increase taxes to cover the difference. And then, of course, the same thing happens again. They waste the money. They can't accomplish their stated goals. and that in turn requires another round of tax increases and so gradually over time this leads to a larger and larger share of society's resources being sucked into the apparatus of government spending and waste hence black hole and in fact it's even worse than that because at every step of this this process the

13:02government's bureaucracy is also increasing because the more taxes you The more complicated the tax code is, the more people you have to audit and keep track of. That means you need more government employees to do all these things. Somebody has to bring the money in and then figure out how to redistribute it. Somebody has to monitor where the payments went, what they're eventually spent on. And then when they inevitably waste the money, then there have to be committees to investigate what happened. And of course, just as a side note, what they inevitably discover is that The problems with spending were, of course, all due to the fact that whatever the project is, it wasn't funded enough. And, of course, this inevitably leads to greater tax increases.

13:49But all these kinds of bureaucracy and countless thousands more, they require more people, more money to support them. And it's all in addition to the basic costs of the supposedly vital services that the taxpayers are supposed to be funding. In the market, over time, you would see costs decrease as entrepreneurs get better at serving people, and you'd see quality of services increase. With government, of course, it works exactly the opposite way. Over time, costs increase, taxes increase, and usually the quantity and quality of services declines. Now, something like roads might seem like a bit of an extreme case, but there are many more common examples as well. The Post Office Why does the post office exist at all?

14:37We do indeed need somebody to send the mail, but why does government have to do it? Usually people try to come up with some kind of justification for these programs based on the idea that the market just can't provide the same services to people. That's what people say in cases like the roads and the schools and healthcare and so on. But when it comes to To the mail, we actually already have dozens of successful companies that do exactly what the post office does, but better and more efficiently. People choose to give UPS and FedEx their money, and if they don't like the service they get, they go elsewhere. Those firms rise and fall based on their ability to satisfy customers. And if you've ever been to the post office, you know that customer satisfaction is pretty much the last thing that they're interested in.

15:25and it shows in the results of their operation. The post office is constantly losing money and has been for decades because nobody wants to use their services. People turn to the market because they know that that's where they'll get the service they're looking for. In fact, the only reason the post office still exists at all is because it has a monopoly on first class mail. and First Class Mail. It's illegal for anyone else to offer that service or to use official mailboxes for any piece of mail that hasn't been officially stamped by the Postal Service. And that type of privilege is important because it gives the Post Office a kind of guaranteed business. But even with that legal privilege, the Post Office still can't make ends meet.

16:10And it's because ultimately they depend on taxpayers for their funding. Now, they're supposed to have accounts, like a normal business. They're supposed to be a self-sustaining operation that is guided by its own profits and losses, but in practice that's not the case at all. The reason is that the Postal Service's so-called business is backed up with taxpayer money and borrowing from the government, which in a sense amounts to the same thing. The Postal Service borrows a lot from the Treasury. In fact, actually, it's maxed out now. It's reached its maximum borrowing limit at $15 billion in loans. And it's in that hole because it's not a business at all. It's just another government agency.

16:55And it has all the problems that we've been talking about that stem from being based on taxation and government spending. It's always losing money. Last year alone the post office lost $15.9 billion, but of course it never goes out of business because it's a government agency. And of course because the system is so bureaucratic, and of course sort of a law of the universe is that bureaucracies never limit their own power, they never ever come up with useful ways to limit the costs. The only way the postal service can think of cutting their losses is simply to supply fewer services. With that in mind, they're actually thinking of eliminating Saturday mail delivery at the end of this year.

17:44They could have eliminated any part of this bloated bureaucratic apparatus that runs the post office. They could have tried millions of different ways to save money, but instead they cut a large part of the service that they're supposed to be providing to begin with. to begin with, this supposedly vital service that no one else can provide, but that in turn ends up hurting the taxpayers again, because after cutting a part of the actual services, the post office can then turn around and say, well, look, we had to do that because our budget is so small now, you know, we've been starved of our necessary funding, so much that we can't do our jobs anymore, we need whatever it might be, a bailout or a for a bigger budget or more lending from the government, you know, just to keep the lights on.

18:31Again, they could have done almost anything to lower their costs, but instead they cut out some part of the service that is very public, that's very easy to see, so that they can in turn use that as leverage to be paid more as a reward for failing and throwing away the taxpayers' money. In fact, it's one of the truly bizarre distortions of reality that people seem to think that the post office is some sort of an ideal example of how government services should be operated. This idea goes way back. For example, about a hundred years ago, Vladimir Lenin famously said that the socialist economy could be run on the principles of the post office, so I guess he'd never visited one either.

19:16But the idea is still around today. I think Michael Moore said at one point that socialized medicine wouldn't be so bad in the U.S. because we already have the post office and look what a success that is. So this is another idea that comes up sometimes. People say things like, well, you know, sure, these government spending programs, I'm sure they're wasteful, but we just have to run them a little bit more carefully. As long as we run them like businesses, and as long as they have accountability and profits and losses, then they'll stay within their budgets and they'll provide more useful services just like regular firms do. But what people don't realize is that you can't just simply say to a government agency, act like a business.

20:04The market, for example, ruthlessly punishes people who don't make consumers happy. It's a fundamental limitation on the way you behave that the market provides, it's not something that you can just simply turn on and off at will outside of the marketplace. So saying that government agencies can be run like businesses, it's a bit like leaving a starving child in a candy store and saying, don't eat anything even though I won't be back for a while. And even when I do come back, I won't really be able to tell if you ate anything, and even if I do, I'm not going to do anything about it. But still, don't eat anything, and just behave as if I was still here monitoring you the whole time.

20:52So you can see, obviously, why that doesn't work. But this is the reason the post office has been repeatedly in crisis over the past few decades, because essentially, there's no connection between its performance and its usefulness on the one hand, and then the size of its budget and the amount of government support it gets on the other. So the post office is not run like a business, and as long as it is ultimately funded by taxes and government spending, it never could be run like a business. Without the possibility of failure, without genuine competition instead of government protection, and without having to truly depend on profits, no organization can be, in quotation marks, run like a business. Those qualities of business are what separates government from the market to begin with.

21:43And you might also just ask another question too, which is that if you want to run government spending like this, if you want to organize government spending like a business, well, why not just make government organizations into businesses? If you already admit that using profit and loss is the best way to manage them, If you admit that the general market principles provide the outcomes you're looking for, well, why not just step out of the way and let markets do what they do best? Again, why do we need this government middleman? Why go through all this show of having a government agency just to turn around and say, don't worry, it won't be what we just said that it needs to be? It's like, sort of like people are saying, you know, we need this to be a government in an organization, although the very reason it needs to be governed is also the reason that it's inherently doomed and needs to be more like the market.

22:41So this is just another example of how people get confused about how spending works and why government spending doesn't do what it's designed to do. It's because it can't be run on these business principles. I was worried there for a second. I thought they were coming to take me away for complaining about taxes. Now, another thing, one thing that I've been kind of saying is that we don't benefit from government spending on taxes, where the we is sort of taxpayers in general, but it's of course really important to point out that there are some people who do benefit from government spending. That's why taxes exist, of course, is to benefit some people at the expense of others, only of course it's not the public in general who benefits, but only some specific groups of people that the state wants to support.

23:32And usually the beneficiaries of spending are our government's friends in the business world. And by looking around at who the beneficiaries are, who's receiving government spending, of course we make this incredibly important distinction that Dr. Salerno raised between the two classes of people in society, The People Who Pay Taxes and The People Who Consume Taxes Once again, pretty much everybody pays taxes of some kind, but of course there are some people who receive more in government spending, both directly and indirectly, than they pay out. And these people receive a net tax payment from the government at the expense of the rest of society. So in that, in a relevant way, they are simply feeding off the productivity of other members of society who are paying more in taxes than they receive.

24:25And so it's the excess wealth of the taxpayers that provides the entire net income of tax consumers, as Dr. Salerno was explaining in more detail. So I want to take this in a slightly different direction. Of course, the most obvious example of the tax consumer would be someone who simply takes payments directly from the government, welfare recipients, for example, would fall into that category, or even simpler, the people who just simply work for the government, the politicians, bureaucrats, administrators, and so on. But then of course there are some far more insidious ways to be a tax consumer as well and the case that's most important is when businessmen are tax consumers because in that case it becomes very difficult to see that people might be only appearing to be making a productive contribution to society when in fact they are overall consuming the fruits of other people's labor. What I have in mind here are things like subsidies and bailouts, and sort of forms of direct income to businessmen, economic regulation in general really, because economic regulation always benefits some businesses, usually the very large ones, at the expense of others, usually the relatively small ones, but these kinds of government spending can be deceptive because the business world ends up mixing genuinely useful products that consumers want with government waste spending.

25:57And it can often become very difficult to tell which is which, and this of course makes things very confusing because it's no longer the case that there's a clear-cut distinction between government, which is the problem, and business, which is sort of the oppressed minority. They become very mixed. As an example of this, if you remember, I think it was during the last election, I believe it was Mitt Romney who got in trouble because somebody recorded him at a super secret fundraising meeting of his top supporters saying something like, half of Americans are parasites feeding off the other half. And this ended up upsetting a lot of people, but the thing is, he was actually right about what he said from the perspective of taxes, because that is exactly what happens with this distinction between taxpayers and tax consumers.

26:48Of course, what he got wrong was which side he and his supporters are on, as they sat there at their $5,000 a plate fundraising dinner saying, you know, oh, we're all so horribly oppressed by the government, Probably crying and wiping their tears with $100 bills, but the point is that it's often these people who are supposed to be a part of the productive entrepreneurial class, who are often the ones doing the exploiting of taxpayers. The sad joke is that they're often the consumers of the tax payments of most other people, which they receive through these various forms of what we call corporate welfare, things like subsidies and bailouts and things of that nature. In any case, this distinction between taxpayers and tax consumers, it's very important because it shows that there is this very fundamental divide in society.

27:42It's simply not true that we're sort of all in it together, and we all share this commonplace and political life, and that we need not worry because we're all equal in the sight of the law. It's just not true. There's in fact a wide and ever-growing gap between these two parts of society, the taxpayers and tax consumers, and it does potentially threaten the very social fabric. So it cannot be forgotten. And that brings me to my last topic, which is to point out that not only is government spending a black hole, in the sense that all the money gets poured in, but nothing useful ever really comes out, but government spending is also a kind of memory hole. For those of you who have ever read George Orwell's 1984, you remember this idea of the memory hole.

28:32The memory hole is the place where the government destroys all the evidence that contradicts its official stories. If you haven't read the book, what happens in the novel is that the government is constantly inventing new lies to tell the citizens to control them. But whenever that happens, they end up contradicting the old lies that they told. So then they have to gather up all the evidence of the old lies and destroy it so that people don't see the contradictions. So they throw all the newspapers and public records and things down this memory hole to be burned. And taxes are like that too, in a way, because governments and other supporters of new and higher taxes, they love to forget about all the promises and predictions they made about the old taxes. Whenever a new tax is proposed, there are all sorts of promises about what it will accomplish and the awful problems in society that need to be eliminated by confiscating people's money and then spending it, and of course, the implication is that the market could never

30:01and Spending on virtually every social problem that exists, and the results have yet to materialize. But nevertheless, people continue to propose new tax schemes as if they had never been tried before, and as if there was not this terrible history of failure involved. The economist Thomas Sowell has pointed out that this is, in fact, one of the great curses of government programs, is that they never go away. It doesn't matter how much they fail or how they make all the problems they're designed The only reply you ever hear from government is, well, the only reason they failed is because we didn't give them enough money. Now, I did give a couple of examples of the basic programs that fall into this category. We could spend days just listing the number of government programs that waste money and that actively discourage healthy economic activity.

30:55and many of these have nothing to do with anything that even remotely resembles a necessary public service. I tried to stick to a couple of things that many people imagine government must provide, but of course even those services are just a drop in the bucket compared to the total amount of money the government spends. But to just kind of sum up, the overall theme that I hope comes through is that taxes really are an unnecessary and destructive blight on our society. As you probably know, there is this inscription on the IRS building in DC that reads, taxes are what we pay for a civilized society.

31:40And the name of this tax day seminar, taxes are what we pay for an impoverished society, is obviously a play on those words. And while the claim that's made in that inscription is false, there is kind of a version of it that is true. I would simply change that to say that taxes are the price we pay for this society, the price we're paying for our society that has so many awful things going on in it, and that it's so desperately in need of so many fundamental changes. So I would say that we should stop paying this price. I would say we should pay a different price, we should buy a different service and we should pay our money to somebody who has an actual interest in helping us improve our lives.

32:27So with that, thank you.