Rothbard's Economics of Taxation: Where the Mainstream Went Wrong

0:00First of all, I have an answer to that question if somebody asks why Virginia gets more money back in government spending than it pays in taxes. The answer is the Washington establishment lives in Northern Virginia, and they make sure they take care of themselves. In fact, friends of ours, Richard Vetter and a colleague, he just retired from Ohio University, University. He did a study for the Cato Institute several years ago where he looked at the average income of Americans and the average income in and around the areas of the state capitals in all 50 states. And I can't remember the number exactly, but I think he said the average income in a certain area around each state capital was 40% higher than in the rest of and of course the same is true of Washington D.C. in general, the average income is much higher than the national average.

0:59And so I think that's a simple answer to why Virginia gets more money back than it pays in taxes. It's because you've got a lot of bureaucrats up there in Northern Virginia. And that's also a big reason why Virginia is going to hell politically at the same time. I moved to Virginia in 1981. I taught at George Mason for eight years. and it's, that's what, 20, 24 years ago and it's changed quite a bit. Back then George Mason was almost like a community college in Northern Virginia, it wasn't nearly as big as it was as it is now, for better or worse, and the political center had just recently started shifting toward Northern Virginia and toward the bureaucracy and toward Washington and I recall some and reading about fierce battles in the legislature from the representatives from this part of the state and southwestern Virginia who really didn't like the fact that they were becoming outnumbered and outspent by the Northern Virginia delegation.

2:02But I guess that's inevitable. And the federal budget, by the way, I believe it's about four times bigger than it was when Ronald Reagan took office. I recall the number of $500 billion as being Jimmy Carter's last budget and so we're talking $2 trillion now. So Lewis Wright, we could eliminate the income tax altogether and go back to the good old days of the last year of Bill Clinton's presidency. It's not as though that would be a great dramatic change. Well, Murray Rothbard, he was an amazing man, and I've never met anybody with such energy as Murray.

2:47You wouldn't know it to look at him, but he was writing brilliant articles and treatises in his 20s. And while he was pursuing his PhD, he was writing all sorts of brilliant articles. And even von Mises, and Lew and I were talking about this earlier, never wrote that much about public finance. Of all the things Ludwig von Mises wrote, and Human Action is this great, thick treatise that Rothbard himself says it's a book on everything. That's how he described Human Action. Even so, Mises didn't really have much to say about tax policy and public finance in general. But Murray Rothbard did, and as Lew said, in Man Economy and State, he covers an analysis of just about every kind of taxation there is. But I couldn't possibly give a talk on Rothbard's economics of taxation in a mere hour and cover all of that.

3:39So what I've done is sort of cherry-pick some of the ideas of Murray Rothbard in his various writings that I think really distinguish him from other public finance economists, other economists who write on public finance. And probably one of the first things I'll mention is that Murray was not only a student of Economic Theory but of political economy, political philosophy, history, psychology, sociology and that's one of the things that to me has always distinguished the great Austrian economists like Ludwig von Mises and Friedrich Hayek and Murray Rothbard and quite a few others that they weren't so narrow, they weren't just narrowly trained and Murray was one of

4:57and essentially a criminal gang. And I'll give you a quote. I'm sure Murray would have agreed with this definition of government by Ludwig von Mises. He said this, government interference always means either violent action or the threat of such action. Government is in the last resort, the employment of armed men, of policemen, gendarmes, soldiers, prison guards and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom." And I'm sure Murray would have agreed completely with that description.

5:45And I mentioned in a discussion in one of my MBA classes once during a break in the class when they were talking about government and so forth, And I mentioned to them, well, you know, basically if you don't pay your taxes, your income taxes, the government can and may well kill you. And they laughed at me like I was a lunatic. But then I just asked them, well, what if you didn't pay your income tax? What would happen? And well, they all knew the answer. Well, a federal agent of some kind will appear at my house and with a piece of paper that says they're going to take my house. Well, what if you resist? I mean, if you're convinced that you don't need to pay your tax, then what will happen? What if you resist the federal agent? Well, then they'll try to force you. How are they going to do that?

6:31Well, they're going to bring guns with them, aren't they? What if you continue to resist? Well, you know what will happen. And so it is true, the bottom line is, as Mises said, government is basically, at the end, the last resort, as he said, is the employment of armed men, policemen, gendarme, soldiers, researchers, prison guards, and hangmen. And so that was sort of the first premise, the first basic understanding of government that Murray started off with. And unlike a lot of other public finance economists, he also was a big fan of John C. Calhoun's political philosophy. And one book I would recommend, if you've never read anything by Calhoun, there's a book called Union and Liberty, and it's edited by Ross Lentz, Published by the Liberty Fund, and it contains some of Calhoun's seminal articles, especially his Disquisition on Government, a book called Disquisition on Government.

7:28If you read that, you know, he was the Vice President of the United States, Calhoun, he was the United States Senator, and it's hard to imagine a Senator or George W. Bush writing a sentence like this, let alone, in fact, it's hard for me to imagine George W. Bush I love being able to read a sentence clearly like this, because obviously every time I see him read, he can't. I mean, he stumbles and mumbles, he can't read, but this is, you know, it really shows you how low we've got with our politicians. But some of Calhoun's ideas, Calhoun was famous for resurrecting what I would call libertarian class analysis, is very different than Marxian class analysis.

8:17Marxian class analysis was about the theory of how the capitalist class supposedly exploited the working class. Well, there was exploitation in Calhoun's theory and in what's called the libertarian class analysis. But the exploitation was the people who ran the government exploited the people who paid for it. As Lew mentioned, the tax consumers were basically the people who got more out of government than they paid in, and then there were the tax eaters, and then the taxpayers were people who paid more than they got back from the government. And that's how Calhoun divided things. And I'll read you a few things because Murray, in his writings on public finance, always seemed to start somewhere by mentioning Calhoun in this basic fact.

9:07Here's one of the things that Calhoun wrote that when one's formed, he's talking about a political community and a democracy, the community will be divided into two great parties, a major and a minor, between which there will be incessant struggles on the one side to retain and on the other to obtain the majority. Consequently, some portion of the community must pay in taxes more than it receives back in disbursements, while another receives in and Disbursements more than it pays in taxes. The community is thus divided into two great classes, class analysis, one consisting of those who pay the taxes and the other of those who are the recipients of the proceeds. And he was a wise man, a Calhoun, he went on to say that the power to tax in a democracy will inevitably be used for the purpose of aggrandizing and building up one portion of the community at the expense of another, which will give rise to violent conflicts and struggles between the two competing parties, and then he went on to say it is a great mistake to

10:09suppose that a mere written constitution would be sufficient to protect individual liberties because the parties in power will quote, will always have no need for constitutional restrictions on governmental powers. And he talked about naive defenders of the constitution who believed that the constitution could somehow be protected by an appeal to reason, truth, justice, or the obligations imposed by the Constitution. He forecast that the power-hungry status would use cunning, falsehood, deception, slander, fraud, and gross appeals to the appetites of the lowest and most worthless portions of the community until the constitutional restrictions would be ultimately annulled World and the government be converted into one of unlimited powers.

11:05How's that for a forecast? That's why, of course, this is all part of his defense of states' rights and the right of nullification in particular, in this particular instance, because he didn't think the Constitution was enough. You had to give the people of the states some sort of power to enforce the Constitution. You can't just let the government enforce it in itself. And so Murray quite often started with Calhoun in a lot of the essays he wrote in his basic theory of government. And this really set Murray apart from your typical public finance economist who struggles and struggles and struggles to argue that taxation is really voluntary.

11:50And I went to graduate school at VPI and I studied under James Buchanan. And he was a professor of mine, he won the Nobel Prize. He was also a colleague of mine at George Mason later after that. And one of the reasons he won the Nobel Prize was public finance. And so when I was at VPI, it was one of the centers in the world of the study of economics and public finance. We had scholars from all over the world coming to state, spend a semester or a year there back when I was there. And so I had a pretty decent training in public finance and one of the things I learned is Because the vast majority of the literature in public finance, when it comes to taxation, is devoted to spinning tall tales about how coercive taxation is not really coercive.

12:36And Buchanan himself has spun a lot of these tall tales, which I'll explain to you in a minute. And so how is this done? If you get into the literature, well one thing we're told is that there's this free rider Another problem that exists with regard to public goods, national defense always used as an example of a public good, it's something that, it's very difficult if not impossible supposedly to exclude anybody once it's provided. For example, clean air, if you define clean air as a public good, how can you exclude anybody once the air is clean? And it's non-partitionable, you can't partition it, you can't sell somebody a chunk of clean or you can't sell somebody a chunk of national defense. It's all or nothing. And with these types of goods, the problem supposedly is if they benefit all of us collectively, there's this incentive to let George do it, to not pay sufficient amounts of taxes, especially in a big community like a state or a nation as large as ours with 300 million people approximately.

13:40There will be a temptation on the part of a lot of people to just not pay, and under the hunch that others will pay, they'll pay enough and I'll just free ride on other people's backs. And from this theory of the free rider comes the notion that, well, then what happens is we all agree to tax ourselves. We all understand this dilemma, that we can't have all these good things that the government gives us, public goods, unless we tax ourselves. There is a big literature in economics suggesting that because of this free rider problem, taxation really is voluntary because we agree to tax ourselves by being part of the political community. But Murray, in his typical clear thinking, just in one sentence, I think, shoots this down by saying, if coercion is used, it is not voluntary.

14:31So you can come up with all the theories you want, but as long as you have a system that where one person says, I'm not going to pay, your theory says I volunteer but I don't really, then watch what will happen, coercion will be used to make you pay. If that's true then it's not voluntary. Then there's the theory that democracy makes it voluntary because we all have the freedom to vote after all, so that makes it all voluntary. Not really, of course as Murray pointed out and as others have too, democracy simply means doesn't mean majority rule tyranny, doesn't mean freedom, doesn't mean a voluntary society. The only way you can have a voluntary community is if there's unanimous agreement. And we never have that under democracy. Actually, you know, democracy, after all, we have to realize that a good example of democracy is if I walk out in a parking lot and I see Mark Thornton's Mercedes sitting out there. And Lew Rockwell is with me and we say, boy that's a nice looking car, let's

15:33take it. And so Lew and I break the window and start her up and just as we drive off Mark Thornton comes running out, wait a minute, wait a minute, that's my car. And Lew and I educate Mark Thornton in the wonders of democracy and tell him that we believe in majority rule so let's take a vote on whose car this is. Lew and I vote, it's our car, So, the fact that we voted doesn't mean it's not theft. It's just theft with a smiling face. And one of the ways Murray explained this in one of his articles was if majority rule democracy means volunteerism, then the Holocaust was a mass example of voluntary suicide.

16:19Because, after all, Hitler was elected. You know, the Germans did elect Adolf Hitler. and so he had a flair for the dramatic, I guess, this sort of thing. And besides that, Murray, as I said, he was well studied in the history of politics and philosophy. So he understood how democracy worked in the ancient times as well as in the modern times, and so therefore he understood what the modern public choice economists know, and that with democracy you don't even get what the majority wants. You know, you get such things as log rolling, where you might not have a majority within a legislature, let's say, in favor of, say, spending more money on schools.

17:04So what they'll do is one group of politicians will say to the farm vote, to the people from the farm districts, we don't really give a hoot about spending more money on farm subsidies. However, we will vote for farm subsidies if when our vote for school spending comes up, you the farmers who don't give a hoot about school spending, promise to vote for school spending. That way even though there's not a legitimate majority, vote trading or log rolling as it's called will get you a majority. So you don't really get a majority rule under democracy anyway. Friedrich Hayek put this in a decent way in his book Law, Legislation, and Liberty. He said what we get under democracy is basically what all the minority coalitions have to give up in order to get what they want next time around, next time the vote is taken on what they want.

18:01So majority rule outcomes are sort of combinations of things that all the minority coalitions decided they have to give up or vote on, even though they don't want, so that when the vote comes for their thing, they can get what they want, next time around. And Murray also understood about rational ignorance, about how the average citizen really doesn't pay that much attention to social policy, public policy. We all spend most of our time educating ourselves about our private lives, doing our jobs, raising families and so forth. The government is so big anyway, it's impossible for any citizen to understand what it's doing. And it's worse than that though. Not only is the average citizen rationally ignorant, but we're constantly bombarded with lies and propaganda by the state and all its minions.

18:51And that's where the court intellectuals come in. And Murray's theory of the state also recognized that governments, as Lew mentioned earlier, are always really a tiny minority of the population, even in the United States today. I think somebody asked you how many government employees. I think the federal government claims it has about 4 million people on the payroll. Of course, there might be tens of millions of contractors who are also contract employees, but it claims it has around 4 million people who get their paycheck every two weeks from the U.S. Treasury. But even if it's 20 or 30 million, it's still a minority of the population. And so, ultimately, the power of the government does rest on the ability of the government to convince this big population that it's legitimate.

19:42That's legitimate. That's why I, for example, think it's unpatriotic to vote. You're legitimizing an unconstitutional government. But we can talk about that some other time. It's off the topic. So Murray wrote in a number of places about the role of intellectuals and how the role of intellectuals is to essentially be court historians and prop up the state in return for jobs, research grants, accolades, and so forth that it gets from being a government economist or a government spokesman of some sort or another. Okay. And so these court historians create quite a barrage of lies and fog.

20:30And I brought a quotation in from one of my favorite government liars, Paul Bagala. Remember him? Bill Clinton's buddy? I wrote this down. He was on television during the... This is an old quote. It was when Al Gore was running against George Bush. Buggala said this, quote, all this insistence on truthfulness on the part of both candidates is getting out of control, end quote. So there's a man who devotes his life to telling plausible lies in defense of his candidate. And he was on television. He was just disgusted with this. Some people in the media are expecting the truth from politicians, whoever heard of such thing.

21:21But this is pretty pervasive. It's pervasive in the public finance area, among other places. So let me give you some examples of how public finance economists have tried to make arguments that taxation really is voluntary. I'm going to start by criticizing my old professor, Jim Buchanan. He's, for probably much the past 30 years of his career, maybe 40 years, he's basically constructed, he's written many, many books and articles constructing what a former colleague of mine named Victor Vanberg, who's a sociologist who used to work with Buchanan, called a voluntary theory of government, voluntary theory of the state. And so, let me read you some of the things that he has written.

22:10Well, first of all, they recognize, of course Buchanan and my other old friend and colleague, Gordon Telleck, who still teaches at GMU also, recognize that really if you're going to talk about voluntary communities, you need to talk about unanimous agreement. That's the only really meaningful way of thinking about volunteerism if it's all unanimous. But you never get that and Politics and Democracy. And so they came up with relative unanimity. That's relative unanimity. I suppose a four-fifths majority is better than a bare majority, but it's still coercion. You're still coercing the one-fifth that disagrees. And so it's a little better, I suppose.

22:58And that really didn't fly too much. They talked about that in their famous book, and Calculus of Consent. And so, after that, Buchanan came up with all sorts of arguments about how coercion is really voluntary. And I'll read you some of these arguments. A lot of his writings involve what's called conceptual unanimity. I'll give you one quote. He calls himself a contractarian. To the contractarian, that law is legitimate and just, which might have emerged from a genuine social contract in which he might have participated. That law is illegitimate and unjust, which finds no such contractual basis.

23:45So, theoretically, if you can imagine a situation where somebody might have consented, then it's voluntary. Leland Yeager, who used to teach at the University of Virginia in the economics department, then he moved to Auburn, and I believe he still lives in Auburn, he's retired now, wrote an article commenting on this statement, where he said, as a rule, if you read Buchanan and others talking about conceptual unanimity, if you replace the word no for conceptual, you know what they're talking about. So it's conceptual unanimity. And he goes on and he says, Each and every participant has implicitly accepted the contract embodied in the rules of the game.

24:30So he doesn't say that participants in the political community actually did accept the rules of the political game. They implicitly accepted. He says the social contract is best conceived as subject to continual revision and change, and the consent that is given must be thought of as being continuous. No word as to why it must be thought of other than he says so. So it must be thought of as continuous. And then it goes even further than this. It says, even when an original contract may never have been made, a social contract between the citizens and the state, when current members of the community sense no moral or ethical obligation to adhere to the terms that are defined in the status quo and when such a contract may have been violated many times over by the state, the status quo define that which exists, hence regardless of the history it must be evaluated as if it were legitimate contractually. So even if you never entered into a contract it's legitimate and even if you did if the state breaks

25:37And if you take the contract on its side of the deal, continuously, you still have to accept the state as voluntary, he says. And David Hume dismissed this kind of argument many, many years ago, long before that, by giving an example of a conscripted sailor. And he said that just because the conscripted sailor does not jump overboard and commit suicide, does not mean that he really consented to being conscripted into the Navy. and that I think would have seemed to apply to what this has to do with. And kind of an interesting thing about this whole area of literature is they claim that since it's called constitutional economics and they claims that the roots are in the founding fathers, Madison and the right, the framers of the constitution, but one of the more famous founding fathers, George Washington, was of the exact opposite opinion Washington's farewell address, in his most famous speech, I suppose, he said this about breaking the social contract.

26:45If in the opinion of the people, the distribution or modification of the constitutional powers be in any particular wrong, let it be corrected by an amendment in the way which the Constitution designates. And here's the important part, but let there be no change by use or patient, for though this in one instance may be the instrument of good, it is the customary weapon by which free governments are destroyed. So George Washington wasn't on the idea that if there's change by use or patient, that is ignoring the Constitution, that we should just pretend that it's all voluntary anyway and go about our business. And if you read this, he probably was ready to draw his sword again if this sort of thing goes on. And so I brought this up because if a reputed free-market economist makes excuses for taxation being voluntary like this, you can imagine what the Harvard economists have been saying for the past 50 years and the other much more interventionist economists

27:47have been saying. And they've been saying an awful lot. I'll go over just some of the things. And of course, the whole public goods theory, the theory of public goods in a free The free rider problem has been grossly exaggerated because it dwells far too much on pure theory, the logic of the free rider problem. It's been restated and restated over and over and over again. But there's a famous article in economics by Ronald Coase called The Lighthouse in Economics. And what this is about, maybe some of you are familiar with this, who have studied economics, is that in all the textbooks in economics for years and years and years, When they would talk about the free rider problem and public goods, the prototypical example was a lighthouse. The lighthouse is there on the shore and it beams this big light and the light is available to all the ships that come by. So it's non-partitionable. You can't have a ship that benefits only from one part of the light. You know, once the light is out there,

28:46they benefit and it's very difficult to stop anybody from benefiting from the light if a How do you keep ship sales into your light, into your harbor, how do you keep them from benefiting from this? So it was thought to be the prototypical public good, and therefore the government had to provide lighthouses. And that was the theory, propounded by Paul Samuelson for many years in his economics textbook. Generations of economic students were taught this. But lo and behold, Coase discovered that in England for many, many years, there were privately funded lighthouses. and it just wasn't true that you need government to provide lighthouses and I found out that this was true in the United States too. I tried to get some foundations to give me a research grant to spend one summer going up and down the East Coast visiting all the beaches studying the lighthouse because I happened to be in Delaware and I took one of these dusk cruises, one of these restaurants that you buy dinner and they take you on a cruise

29:48This is the Delaware Bay at dusk, and the captain of the boat pointed out this broken down old lighthouse, and he had some history, he had something from like the local chamber of commerce or something, and he said, you know, 150 years ago, merchants from New England kept ship wrecking, wrecking their ships on the rock side here, he's pointing at these rocks, and so they all chipped in and built a series of lighthouses from here all the way down to the Carolinas, and your own nickel. So that's what gave me the idea. I think to this day, it probably still would be a legitimate research project, whether I could get a grant to subsidize my summer vacation or not. But you could probably find the information about this in local courthouses and historical societies.

30:36And so if anybody's ever been to the beach near Rehoboth, Delaware, you might have seen some of these broken down old lighthouses down there that they're privately funded. And so the free rider problem has been grossly exaggerated. Not only that, if you have a problem like this, there are all sorts of ways of getting around it. In my book on capitalism, I have a whole chapter called Highways of Capitalism. And it's about a literature in economics about how roads in America, roads and canals, were primarily privately financed in the early years of the Republic, around the turn of the 19th century. A road is supposedly a public good and would provide all these benefits that only tax dollars could provide.

31:23Not true. There were thousands of miles of roads built all over the United States at that time, privately financed. And whenever they did run into free rider problems, they used social ostracism as a tool to get the members of the community to pay up. They didn't pay up, but they invested. The investment was only returning about 3% on the road building, which was below the market, what you could get on other investments. However, the merchants of all the towns understood that it wasn't just that 3% return that they would be getting, that they would be selling a lot more of their goods if their town was connected to other towns nearby. There would be more business, the community would grow, and so people understood that there was more to this There is more to this than just a 3% return and so they understood that and they urged all their neighbors and their friends and relatives to invest, and they did, and they did.

32:21When railroads first came around, the Mormons built several railroads in Utah, in the state of Vermont they were privately built railroads in Vermont, and so, and this was long before the government got in the business of subsidizing the transcontinental railroads, and in fact In fact, I also talk about how the governments did, the state and local governments did get involved in subsidizing railroads and after the early, the early 1820s was when railroads were really invented and so after that, state and local governments did, but it was such a calamity, the waste of government money for railroad, rail building and construction that by the time the so-called civil war broke out, by the time that broke out, I think every single state, I think Massachusetts was the only state that had not amended its constitution to prohibit the use of taxpayer dollars for private corporations for such things as road building and railroad building because there had been so many scandals, so much corruption and waste and abuse and so forth.

33:26So here's, you know, supposedly a classic public goods problem, road building was totally done in the early years, not totally but you know pervasively done with private financing okay another thing government does and this is another Rothbardian type commentary is if the government steps in to provide a supposed public good it short-circuits the entrepreneurial process whereby entrepreneurs individuals would figure out a way around these problems how to finance the roads how to finance the Railroads. Why bother if the government is stepping in and doing it? And so we don't know what would have happened with the transcontinental railroads. The same argument was made that the government needs to finance them. That became, of course, one of the biggest and most corrupt boondoggles in American history after the Civil War with the Crédit Mobilier scandal of the Grant Administrations. And James J. Hill came around and built a privately When he financed railroad, the Great Northern, without a dime in his autobiography, he brags that he didn't get a dime in government subsidy, not even a land grant.

34:38He paid for rights of way all the way along the way, and he built it better and faster and more profitable than all the government subsidized railroads. And so, you know, that would have been the alternative. Had the government not stepped in and done this, we wouldn't have had all the corruption, and all the waste and so forth, and it might have taken a little longer, the transcontinental might have been built in 1880 instead of 1870, completed, but it would have been built a lot better. As far as, you know, the basic argument about public goods is that, well, people will contribute but not sufficient amounts, therefore we won't have enough. Well, that seems to be, I think the scientific term is ass backwards.

35:26I think it's a scientific term for this. Because, you know, it's government that creates shortages. Just look at California energy. You know, who creates the shortages in bottlenecks? Look at traffic in Northern Virginia on all those government roads. Who is creating the bottlenecks and shortages of goods and services? The schools, you know, who's creating all these problems? It's not that we're stingy so much as it is. Government is inherently inept in providing these things. So very little of what government does is genuine public goods by any definition, especially at the state and local level. I used to hand out to some of my classes, there's a publication called the Municipal Yearbook, that is sort of a handbook for local city managers, and it listed all the things that city governments do.

36:46cannot do, and cannot do better for that matter, as far as that goes, so very little of what governments do is that you could really call a public good, and Murray made that point, and besides that, much of what governments do is a public bad, it's not a public good that we're all dying to have, it's a public bad, take public education for example, it's not considered to be a public bad, welfare, look at what welfare has done to the Society, destroying the work ethic, breaking up families, all these things have been documented a thousand times over. That's a public good. Social Security, the post office, that's a public good. And so much of this is just a public bad, which makes the free rider problem seem even more ridiculous, because if so much of this is a public bad, then the problem Supposedly is, we can't raise enough money to provide these bad things, therefore we need to coerce people so we can have more of these bad things. That's basically the

37:52idea. And then the other economic rationale for taxes is externalities, external benefits and costs. And like as with public goods, this is greatly overblown in theory by relying One of the very well-known articles on this in economics is an article on what's called the fable of the bees and the story is about how if you consider a situation of an apple orchard and you've got bees that are owned by a beekeeper somewhere, the bees go in there and pollinate the apple trees and the apple trees feed the bees.

38:38So there's some sort of a reciprocal benefit going on there between the beekeeper benefits because his bees have food and the apple orchard owner benefits because his trees are pollinated and they grow more apples. And this is another, for years and years, decades, this was a textbook example of market failure. And the reason was, the logic was, well, there's an external benefit. You see, the beekeeper, he invests in bees because he sells honey. But not only do his bees provide honey, they provide what's called an external benefit to apple orchard owners. But the beekeeper doesn't take that into consideration. He only takes his own private benefit into consideration.

39:24Therefore there is an underproduction of bees and the government therefore should subsidize beekeepers. And the same with apple orchard owners. They're providing a benefit, the apple orchard owner only takes into consideration the fact that he's selling apples and profiting from selling apples, but they're feeding some guy's beads, so they're providing an external benefit, he should be subsidized too, there's a market failure, the market fails again, how about that, and there's an economist named Steven Chung who used to teach at the University of Washington in Seattle, where they grow a lot of apples, and he was kind of familiar with the apple industry, He published this article that was in the Journal of Law and Economics many years ago on the fable of the bees and lo and behold he found that there was a long paper trail of very detailed contracts between beekeepers and apple orchard owners to make sure that they got the maximum benefit from the bees pollinating the apple orchards in very detailed such things as if the orchard owner is going to spray pesticides,

40:29he has to give two weeks notice to the beekeeper so he can get his bees out of there and they don't harm the bees. So without the government stepping in and controlling the bee industry, and this was used in Samuelson's textbook and all the textbooks of market failure, we need to raise taxes to subsidize beekeepers and all this, But, you know, the market worked it all out very easily. It's no sweat. And there are many, many examples like this of where economists rely purely on this theory, which sounds very plausible, but they never lift their rear ends up off their swivel chairs and look out the window to find out what's really going on out there. But Murray Rothbard did. And so that's another virtue of Murray's that he was a great theorist, Another comment that Murray Ray made somewhere that I really loved was that about free riding is, if you think about it, the working class free rides off the efforts of entrepreneurs, and if you think about it, you know, some businessman who mortgages his house and all his property because he thinks he has a great business idea,

41:45and starts up the business and ends up employing 10,000 people. You know, those people are free riding. You know, he risked everything. You know, he invested all his money. He risked everything. He worked like a dog for years and years. And it finally pays off. And the working class, the people who work for him, are basically free riding off a lot of his efforts. But Murray says, well, so what? You know, should the government intervene there and tax the workers to make them pay for this guy's investment? Of course not, but if you take the free rider theories seriously, you get into all sorts of suggestions like this of government tinkering in almost every aspect of people's life. Lou mentioned tax neutrality and the economists have a number of different definitions of what they call tax neutrality.

42:35One meaning of it is if we can make the taxation and government spending kind of like the market, try to make the whole business of taxing and spending similar to a market, it'll be efficient. And how do we do that? Well, we try to set taxes equal to the benefits of government spending. Because when I buy a loaf of bread, presumably the benefits are a little higher than what I pay for it. Otherwise, why would I buy a loaf of bread if the benefits were equal? But anyway, that's one of the meanings of tax neutrality. But, you know, using his common sense again, you know, Murray pointed out that, well, taxes are always larger than benefits to the citizens because you have to subtract out the money that goes for the government administration.

43:25And so you can never have taxes that people pay equal to the benefits that they get from government if they do get any benefits at all, because you have to subtract out all the money that goes to pay all the bureaucrats and the overhead for the government itself. So you can never have that. And besides that, benefits are subjective. You can never set taxes equal to benefits because benefits are subjective. They're in the eye of the beholder. So it really doesn't make sense. And I'm going to read a quote from Murray Rothbard on this This topic about the subjectivity of benefits and the absurdity of thinking that it would be desirable or possible to set taxes roughly equal to the benefits of government spending.

44:11He said this. This is in his book, The Logic of Action II. He has an essay called The Myth of Neutral Taxation. If indeed we are to tax people in accordance with their benefit from government, we would We would have to tax all the net tax consumers to the amount of their subsidies. We would have to tax 100% of the salaries of bureaucrats, of the incomes of welfare recipients, and of defense contractors, and so on. We would then have our ideal model of the neutral tax, where all recipients of government funds would systematically repay them to the taxpayers, and an absurd, if rather charming, state of affairs. And so, I think he pretty much destroyed that idea.

44:59And so, if you read Murray on taking on the mainstream economists and taxation, you find that the public finance economists, a lot of them, have acted as court historians, more or less, who have concocted a lot of excuses State Power and State Invention dressed up in the language of economic science, but it's not pure science, there's a lot of subjectivity involved there, and that's one of his themes. And Lou mentioned loopholes, I'm going to close by mentioning loopholes, and Murray was of course atypical of the mainstream of the profession on loopholes. I recently went to a dinner with some of our economic students at Loyola every spring, We have several dinners for students. One of this one was the Adam Smith club. We have an Adam Smith club on our campus and we have an annual dinner and one of our alumni come to it and one of our alumni were talking about tax policy and he was saying how much he was appreciative of George Bush talking about tax neutrality in the closing of loopholes in the name of efficiency and he was well taught

46:15by Whoever Taught on Public Finance in my school, and so it motivated me to write a little article for Mises.org on this, because it struck me that here's this young man who is a financial advisor now, and we're working for some company, spending millions of other people's money or investing millions of other people's money, and he was essentially saying If I pay my accountant $500 and he saves me $5,000 in taxes, that's not efficient. From my perspective, that's pretty darn efficient. And moreover, if I do this every year, if I pay my accountant $500 every year and he saves me $5,000, $6,000 every year, that's not efficient, if I do this year in and year out.

47:04And that just doesn't make any sense. When people keep repeating a particular pattern of behavior year in and year out, that's the prototypical definition of economic efficiency in the eye of the decision-maker. But that goes against the grain of what the mainstream has to say. I dug up an Associated Press article about the current discussion of tax reform. President Bush said he wanted a tax reform that was, quote, fair without tax loopholes for special interests. and it was also revenue neutral. And that's kind of interesting for a reputed conservative. As I said, the government budget now, the federal budget, is four times what it was when Ronald Reagan took office. And so here's the latest Republican president saying he wants any tax reform to be revenue neutral, which means the government budget should not drop by a single penny.

47:58It has to be the same. So he's endorsing this current side of the government. The AP article said, Republicans in the House of Representatives want, quote, a flat tax that gets rid of deductions, thanks a lot, while other conservative tax reformers argue for reduced income tax rates that are, quote, paid for by eliminating or scaling back deductions. So they want to raise one tax and reduce another tax paid for. And so the underlying premise, of course, is that the state has some sort of God-given right to the current amount of income that takes out of our pockets and nothing should happen that would reduce that amount of money. And that's all called science.

48:44That's called objective science by economists. But Murray thought otherwise. And for one thing, do we have any tax accountants in the audience, tax lawyers? No, there's not a single tax cop. He's admitted, okay, that man is a hero. He helps people reduce their tax burden. And so when you read all these quotes from the Bush administration and elsewhere, special interests, loopholes, evil special interests, what are we talking about here? We're talking about the John Hancock of today. John Hancock was a smuggler. He helped Americans get around the import restrictions from King George, tax lawyers and accountants who help people figure out how to reduce their tax load are doing the same thing.

49:36They're heroes of the civil society, the way I see it, but the media talks about them like they're some sort of borderline criminals helping people reduce taxes. A few other things about tax loopholes. Now, one argument that's often made is that, you know, tax loopholes, you can never give, it's hard to think of a tax deduction that benefits everybody. If you don't own a home, you don't benefit from the mortgage interest deduction, and so forth. And the argument is often made that, well, since everyone doesn't benefit from it, it's unfair. Therefore, we shouldn't have it. Murray's take on this is what, well, if not everyone benefits from it, what we ought to What we have to do then is work as hard as we can to try to expand it so that everyone can benefit from it.

50:30That's the approach to take, not to complain that it's unfair, we don't benefit from it, because after all, what happens in the economy that benefits everybody? In a capitalist economy, nothing that happens at any time in a capitalist economy benefits everybody equally. But with tax policy, the discussion is always, well it has to be fair, it has to benefit everybody equally, Another argument is that if tax deductions are given, say, to one industry or a few industries, but not all industries, then what will happen is that the allocation of resources will, of course, be diverted artificially into those industries that are given this special tax tax deduction, and therefore the return on capital in those industries will be higher than elsewhere, and it will be different than what happens under the free market, with no deductions at all, neutral tax policy, and almost any economist you'll read about or listen to will say this is a bad idea on efficiency grounds to do this, but once again Murray's

51:42clear thinking asks the question, well what's the alternative? What's the alternative with with doing away with the tax deduction for Industry X, it's to give the government more money. It's to bloat the government even more. And why is that a good thing? And so that's why Murray was of the same opinion that Milton Friedman has often expressed. Milton has often said that he's in favor of any kind of tax cut at any time, for any reason, for any purpose, anywhere. But it deprives the state of more money, and that's always a good thing, despite all these efficiency and inefficiency arguments that you hear. So that's just about all I wanted to say about Murray's take and why it is different than a lot of the mainstream tax analysts, other finance economists.