Monthly Archives: December 2011

The Idiocy of the Drug War

As a libertarian, I believe that individuals should have the right to do whatever they wish with the condition that they are not affecting anyone else’s liberty. That includes putting whatever substances one wants to put inside his or her own body. After all, if a person cannot choose what to put and what not to put inside their own body, do they really own their own body? Or are they instead a slave to other individuals who have the good fortune of making the rules?

In society today, we have laws that would confirm the belief that the latter is actually true. Certain substances are not allowed to be traded, possessed, or consumed, for a variety of reasons but all generally under the category of “keeping people safe.” But it seems obvious to anyone who actually chooses to examine the so-called “war on drugs” that this war is failing. Not only has the government failed to keep the drugs out of people’s hands, but they have failed to keep people safe as well. It seems rather that they have achieved the exact opposite.

So when I read an article last week describing and commenting on some of Ron Paul’s positions, I had a good laugh. Jeffrey T. Kuhner states:

“His support for homosexual rights and the legalization of drugs, including cocaine and heroine, represents an assault upon traditional America. His libertine libertarianism would lead to a more permissive society and widespread drug use, especially among youth.”

But wait a second! Isn’t that how it is… right now? “If drugs are legalized, then even teenagers are going to start doing it and everybody will be on drugs!” The irony of statements like these makes me

When it comes to drugs, a good question to ask is “Why is there so much violence?” The obvious answer is that the drugs are illegal. If cocaine was more abundant, would people be willing to shoot each other over it? If the price of cocaine wasn’t so high, would people be willing to shoot each other over it? If each and every person was allowed to produce, trade, and consume cocaine, without fear of being imprisoned, would people be willing to shoot each other over it? Obviously not.

Further, a commonly held opinion is that “Monopolies are bad!!” Most of us hardly give it any more thought than that. Most don’t even think to make the connection of monopolies to the drug war. After all, isn’t the drug war itself just the government giving gangs a monopoly on drugs? Perhaps an oligopoly would be the correct term to use, because there are multiple gangs, but the point is still the same.

States like California give some hope with their partial legalization of marijuana, but with the federal government still involved, full legalization of drugs may be an extremely long time away. Even if the federal government chooses to legalize it, even if the states choose to legalize and regulate, I doubt we will see much of a difference. The regulation of these drugs, whether from federal or state governments, will undoubtedly lead to the same situation we have now, just in slightly different terms. Unfortunately, we can expect to see the drugs monopolized by certain big corporations through the force of regulation, the same corporations who are trying to keep the drugs illegal right now. Money speaks in politics, and when you see a law that may not make very much sense to you, ask yourself the question “Who does it benefit?” and you are sure to understand why the law is in place. This being said, the companies that want drugs with medical benefits to stay illegal, are the same companies who would be hit the hardest if the drugs were legalized and their services were no longer needed. So even if the drugs were somehow legalized and regulated, it wouldn’t be very bewildering to find out that a few big companies were the only ones with the ability to produce and sell them. Hell, they probably would have been the same ones that lobbied for and helped write the legislation for the regulation. This is the undying nature of all political systems.

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Why True Libertarians Will Advocate a Head Tax

Yeah yeah I know true libertarians will advocate no tax, but I will argue that those libertarians who do advocate a specific tax should be advocating a head tax.

Many libertarians tend to lean toward taxes such as the flat tax (where everyone pays the same income tax % regardless of their income; ex. 10% income tax for every individual) or the fair tax (a flat sales tax with a prebate, a monthly check the government sends out to poor families so they don’t have a burden too large; ex. 10% sales tax for every sale with $1,000 check to families under $x income).

The fair tax has unfortunately gotten a lot of support in part due to misinformation about its real effects. Proponents argue that a consumption tax would shift “spending from consumption to investment” by discouraging consumption and encouraging savings. I have already exposed this myth in my previous post where I explained how a consumption tax is itself an income tax. In fact, it is impossible to institute a tax without discouraging savings. Not only that, but I have no idea why a libertarian would be advocating higher savings in the first place. Savings is only future consumption. That being said, what is more attractive about future consumption than present consumption? Shouldn’t such a choice be completely left up to the individual?

Although I would prefer a flat tax over the current progressive tax system, where wealthier individuals have a higher % of their income taxed, I think many libertarian proponents of a flat income tax should be aware of a way a flat tax could be instituted and people could be worse off. After all, (all other things equal) individuals will choose to live in the country with the lowest taxation for themselves. That is, people would prefer to live in a country with a progressive tax rate of 8%, 9%, and 10% over a country with a flat tax rate of 20%.

So while I could see myself supporting either a fair tax or a flat tax as long as either appropriated less resources from the private sector (something very difficult to tell in the case of comparing a sales tax to our current system), the tax I would advocate as a libertarian would be a head tax (ex. every individual has to pay $1000 every year to the government). After all, even in the case of a flat tax, why should any individual have to pay more than another individual? Even if you treat government services as market services, where in the market do individuals have to pay more for a good simply because they earn more income? It would asininity if a person making $100,000 had to pay $5.00 for an apple while a person making $5,000,000 had to pay $250.00 for the same apple. Progressives like to argue that a wealthy person receives more from a government’s services than a poor person does because a wealthy individual has more wealth being protected. However, a wealthy individual would be the one more able to pay for the protection of his wealth in absence of the government; a poor person would have a much more difficult time.

Not to mention that a head tax would have to be extremely small in order for everyone to be able to pay it. It’s funny that I thought this was a con of a head tax when I was younger, but now it’s probably the largest pro. A small government would be absolutely necessary due to this limit on taxation and there would likely be far more civil and economic liberty.

How a Consumption Tax Discourages Savings

In my criticism of Fareed Zakaria’s article two weeks ago, I pointed out a common fallacy of modern economics: that a consumption tax discourages consumption and encourages savings. I’ll explain more clearly in this post why this is not true.

Before beginning, I should explain the concept of tax shifting. Who actually pays the tax? Is it the person who directly pays the tax, or is there some way that person can shift the tax onto someone else? A good example of this is a payroll tax, where a business is forced to pay (let’s say) a tax of 5% of a worker’s wage every time it hires a worker. Assuming the worker would normally receive a $10.00 wage without the presence of the tax, the worker now receives a lower wage, a wage of $9.52. (a 5% tax on $9.52 is $0.48, adding up to approximately $10.00)

So in this case, the business shifts the tax to the worker. We can say that the business is the direct payer of the tax but the worker is the true, indirect payer of the tax.

A tax not only hurts the true payer of the tax, but it also hurts everyone that person interacts with. These are the indirect effects of the tax. To quote Rothbard, “Thus, if an income tax is levied on Jones at 80%, this will hurt not only Jones, but also — by decreasing Jones’ incentives as well as capacities — other consumers by reducing Jones’ work and savings. It is therefore true that the effects of taxation diffuse outward from the center of the target.” Note that this is not the same thing as shifting. The direct effects of the tax still affect specific individuals, while the indirect effects of the tax affect others who interact with those specific individuals.

Now we can move on to the example of a consumption tax and apply these two concepts correctly to clear the confusion.

First note the logic in the following situation: a 10% sales tax is imposed on the sale of a lawnmower that normally has a price of $100.00. At a very basic level, people might analyze the situation and say “Okay, so the price moves to $110.00 and the consumer has to pay the whole price. Therefore, consumption is discouraged and savings are encouraged.” However, the lawnmower retailer will always have the price at the profit-maximizing price, originally $100.00. The tax does nothing to change that. If the lawnmower retailer could have raised the price to $110.00 and received a higher profit, he would have done so without the tax.

So initially when the 10% tax is placed on the $100.00 lawnmower, the price to the consumer stays the same. The total price will be $100.00, and approximately $9.00 will go to the government in taxes and approximately $91.00 will go to the retailer.  The price is still the same for the consumer but the retailer now receives less of a profit, or even losses. So in this case, the consumer is the direct payer of the tax but shifts it to the retailer, who becomes the true payer of the tax. (I don’t know how lawnmowers are made so I’ll intentionally be vague) The retailer, now with lower profits or even losses, lowers his demand from the factory making lawnmowers, shifting the tax back to the factory. This process occurs again and again, until the tax is shifted backward to the original factors: the land, capital, and labor. The tax hits the income accruing to these factors. Therefore, we conclude, a sales tax is an income tax.

Now, to clear up another source of confusion. The total price of lawnmowers does indeed go up, just not in the way many would think. As explained before, the price cannot go up immediately upon the imposition of the tax, because the retailer is already selling at the profit-maximizing price. However, the indirect effects of the tax, after the shifting process above described, will be to lower the supply of the good. The supply curve of each good, starting with the land, capital, and labor, and ultimately reaching the lawnmower retailer, will increase, making the price of each successive good higher. So the indirect effects of the sales tax will be to raise the price of the lawnmower, reducing consumption. The resulting profit-maximizing price will likely be somewhere between $100.00 and $110.00, assuming the demand curve stays the same. Consumers are indeed hurt by the consumption tax, but by the indirect effects, not by the direct effects.

Meanwhile, the direct effects of the tax on income will discourage savings in two ways. Firstly, because the land, labor, and capital owners get less income, they will have an incentive to consume more. To explain this in another way, because the land, labor, and capital owners now have a lower return on savings/investment, they will choose to consume more and save/invest less. Secondly, the lower a person’s real income, the higher their time preferences. That is, the lower a person’s real wage is, the lower their ability to buy products, the higher their consumption to savings ratio will be.

So at its very heart, a sales tax is itself an income tax. Consumption and savings will both be hurt, but savings will be discouraged even more than consumption.

The Myth of the Social Security Surplus

I think this is a relatively well known fact (at least for those that pay any attention to politics), but there’s no harm in presenting it to those that don’t know about it.

There’s been a lot of news lately regarding Social Security and Medicare/Medicaid and how these programs are going bankrupt. However, many believe Social Security is currently fine and that there is actually a large surplus (2.7 trillion as of 2011) that will cover us for a time.

Social Security takes in money from young wage earners and passes it on to retirees in the program. The remaining money was supposedly kept as a surplus, but a lot of people believe in the myth that this surplus was some sort of lock box. The truth is that politicians have taken this money and spent it on other parts of the budget and instead left the surplus with IOU’s in the form of government bonds.

Who pays for these bonds? Tax payers. Who paid for the surplus in the first place? Tax payers. So tax payers are effectively paying twice for any of the money that goes into the surplus.

As a related fact, many liberal pundits like to claim that Bill Clinton, former president, ran a surplus in government spending. This is a myth as well. The truth is that the national debt expanded in every year of Clinton’s presidency. So why are these claims made? Because Clinton took money out of the Social Security surplus in order to pay for the government budget. See here for more information.

I’m not making an assertion that Social Security doesn’t help those on the program or that the majority of citizens don’t like it, but SS as a program is a politician’s dream. It is a simple money transfer system that politicians can conveniently take money out of and spend for other things, in the guise of keeping a surplus. Meanwhile, tax payers are forced to pay twice to keep the program solvent.

Critique of Fareed Zakaria’s article “Complexity Equals Corruption”

Fareed Zakaria recently wrote an article in TIME Magazine concerning Cain’s 9-9-9 plan. It’s somewhat of a promotion, not for Cain’s ” specific policy proposals but their general thrust.”

Humorously, the title is about the only thing I agree with, but even there I have some minor quibbles.

Cain’s 9-9-9 plan involves eliminating the entire tax code and replacing it with a 9% income tax, a 9% corporate income tax, and a 9% sales tax (as well as a 9% payroll tax Cain conveniently forgets to mention).

Zakaria states:

Most Americans believe that the federal tax code is highly complex and fundamentally corrupt. They are right. The federal code (plus IRS rulings) is now 72,536 pages in total. The code itself is 16,000 pages. The statist French have a tax code of 1,909 pages, only 12% as long as ours. Countries like Russia, the Czech Republic and Estonia have innovated and moved to a flat tax, with considerable success.

Complexity equals corruption. When John McCain was still a raging reformer, he pointed to the tax code as the foundation for the corruption of American politics. Special interests pay politicians vast amounts of cash for their campaigns, and in return they get favorable exemptions or credits in the tax code. In other countries, this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal, but it is the same—cash for politicians in return for favorable treatment from the government. The U.S. tax system is not simply corrupt; it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money to its favored funders through the tax code—without anyone realizing it. The simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away: preferential tax treatment. A flatter tax code with almost no exemptions does that

Now while I agree with this statement, it should be noted that tax simplification is only a form of delaying corruption. All governments are corrupt by nature. Getting rid of tax exemptions is only getting rid of a symptom. If you have power concentrated in one place, corruption will follow; it’s just a matter of time. In addition, adding a sales tax to the federal roster for possible taxes in the long run will do more harm than good. If you want to simplify, don’t add any new taxes.

Zakaria goes on to point out the benefits of a sales tax, stating there will be less tax fraud and that it would be a more stable form of income:

Second, it provides the government with a more stable source of revenue than income taxes, which fluctuate greatly between boom and bust years. Third, Americans consume too much, often using credit and leverage to do so. A consumption tax would moderate this behavior. Government will always get less of behaviors it taxes and more of what it subsidizes.

Both of these points would be solved by eliminating the Federal Reserve. Over consumption, in not just the US, but in countries all over the world are caused by the easy credit the Fed (as well as fractional reserve banking) provides. Not just in the literal sense of banks giving loans that individuals spend needlessly, but also because of the fact that easy credit to businesses spawns a boom for the economy, leading to a production structure where consumption and investment are abnormally high, only possible because of the capital consumption that takes place, leading to an eventual and inevitable bust (as explained by the Austrian business cycle).

Even more annoying is Zakaria’s application of the common fallacy that sales taxes discourage consumption. Although this is true in a literal sense (all taxes reduce consumption), the idea that Zakaria is referring to is undoubtedly that consumption taxes encourage savings and discourage consumption. This is incorrect. A consumption tax discourages savings just as an income tax does. The flaw lies in observing the direct payer of the tax rather than the true payer of the tax.

Take an example of a retailer selling a box of Oreos at the store for 4 dollars. Now add a 10% tax in. The price of the Oreos is now $4.40. Consumers will buy less and save more right? Now that the price is higher? Nope!

Think of it this way instead. A retailer is already selling at the price that gives him his maximum profit. If he could have raised the price to $4.40 and received a larger profit, he would have done so before the tax. There was nothing stopping him from raising the price before the tax was even in place. The fact that the price was at $4.00 rather than $4.40 proves that $4.00 was his profit-maximizing price. The addition of the tax necessarily hurts his profits. His price will most likely be higher than $4.00 (inclusive of the tax), but lower than $4.00 (without the tax).

So the the retailer will lower his demand from the factory, and eventually this reduced demand will hit the land owners/capital owners, who will in turn, reduce savings. The tax gets shifted backwards. (I will probably make a future post more detailed about this process, but consider the logic I have just mentioned for now)

Zakaria ends the article by announcing his own form of Cain’s tax plan:

My version of Cain’s proposal would be flatter but not flat: 9% for the first 90% of Americans, 18% for the next 9% (incomes starting at $150,000) and 27% for the top 1% (incomes starting at about $500,000). I would keep a few straightforward deductions—state and local income taxes and charitable contributions. I would lower the corporate rate to 18% and impose a VAT of 9%. Finally, I would enact a 50% inheritance tax, because nothing is more un-American than an inherited elite that perpetuates itself. So my proposal is a bit more complex—the 9-18-27-18-9-50 plan. Don’t expect it to catch fire on the campaign trail anytime soon.

Ironically, it’s quite a bit more complex, even with “straightforward deductions” that would assuredly be expanded over time. Also somewhat comically, after just stating that government “will always get less of behaviors it taxes and more of what it subsidizes,” he decides to add a value added tax(VAT) of 9% to his tax code. It seems like Zakaria wants a tax code discouraging value! And here I would agree, that’s exactly what would take place.

As for a 50% inheritance tax, I think Zakaria and I disagree on American values. He attempts to demagogue by saying “nothing is more un-American than an inherited elite that perpertuates itself.” He might as well have said nothing is more un-American than gift giving! I would say the most fundamental American value is liberty. And liberty to give and receive gifts is part of this liberty. If you want to be upset at inherited elites who perpetuate themselves, be upset at those who abuse the power of government to do so, rather than those peacefully passing on what they have accumulated in their lifetime.