Congratulations to R.W. Johnson for his superb "The Energy Crisis—And How To Solve It," (REASON, May 1975, pp. 4-15).
I wish I had the space to reprint the entire article right now in Mining Engineering. But I shall do so at the earliest opportunity.
Meanwhile, Mr. Johnson's article will serve as an invaluable source of data and direct quotes, and I shall strongly recommend it in every talk I'll be giving from now on. REASON's May issue, incidentally, provides me with the best possible material to promote REASON whenever and wherever I can to members of my profession.
Editor, Mining Engineering
Salt Lake City, UT
R.W. Johnson presented only one side of the story of government involvement in nuclear power plants. The endless regulation was to be expected when the Price-Anderson Act (Section 170 of the Atomic Energy Act) set the limit for a utilities public liability at $560 million per nuclear accident, with the taxpayers paying about 80 percent and the utility 20 percent.
The primary concern of opponents of nuclear power has been the degree of risk that was involved in the production of power and the disposal of waste products. The assessment of risk is essentially an actuarial function rather than a political function. If a private insurance company must calculate and charge premiums sufficient to cover the level of risk to other people's property then the true economic costs of nuclear power would be reflected in the costs to the utility. The profit making incentive of the insurance company would doubtless result in a realistic level of safeguards.
Until utilities are willing to remove the cost of their liability insurance from the taxpayer we will continue to have extensive regulation of nuclear reactors.
Mr. Johnson replies: I certainly agree with Mr. Ringenburg and this was included in my proposal (see page 14 of the article).
There is ample operating experience now with nuclear reactors, and there is also one of the most comprehensive analyses of the problem ever made, in the Rasmussen Study (see Reader's Digest, April, 1975, pp. 169-178) to permit actuarial determination of risk. I see no reason why the taxpayers ought to subsidize any private utility, nuclear or not. —R.W.J.
EFFECT OF BUSINESS TAX
I enjoyed reading R.W. Johnson's article, "The Energy Crisis and How to Solve It" In the section entitled "The Answer," however, I am afraid I had to strain a bit to follow the thread of the argument. If the interpretation I finally came up with is the correct one, I am afraid that Mr. Johnson tripped himself up on this particular point.
The section at issue begins with two lengthy paragraphs which, as far as I can determine, boil down to the following argument: When the government increases taxes on business, management simply factors in the increased taxes when deciding what prices to charge, winding up with the same after-tax profits as they would have earned if taxes had not been raised at all.
In other words, it is not possible to tax business. Any tax that is billed as a tax on business is in reality a hidden tax on the consumer. Thus corporate income taxes are no different than sales taxes; "windfall profits taxes" on the oil companies are no different than a tax on gasoline at the pump; etc. For example, Johnson says (page 12) that "any proposal to do away with business taxes meets with anguished outcries that we would be taxing the poor who can least afford to pay, as though a tax levied on business is not ultimately paid by the people anyway."
Note that if this argument were true, then business taxes would be inherently more equitable than "progressive" income taxes on individuals, since the same individuals would foot the same bills, but at flat rates rather than at rates graduated in proportion to income. Note further that if this argument were true, then business taxation would not discourage business activity at all. The level of business activity would be the same if government operations were funded entirely by taxes on business or by sales taxes paid openly by the consumer. In that event, Johnson could not say, as he says a bit later, that "The end result is to encourage waste of true wealth and a discouragement of incentive to produce true wealth." Since a major purpose of Johnson's article is to argue for the elimination of business taxation in order to stimulate business activity, it is crucial to his own argument that he be wrong on this particular point.
And he is wrong. The reason: The American economy does not exist in isolation. It is immersed in the world market. As a result, if the U.S. Government places taxes on American business that are higher than the taxes levied on business in some other nations (e.g., West Germany and Japan), the effect is to place American business at a competitive disadvantage vis-a-vis their foreign competition. If they attempt to raise their prices to compensate for the tax differential, they price themselves out of their own markets. A copper producer, for example, cannot factor in increased taxes by raising his quote above the world market price—not if he expects to stay in business. Further, the U.S. subsidiary of a foreign firm also enjoys a tax advantage, even though its U.S. division pays U.S. business income taxes according to the same rate schedule as its U.S. competitors. The reason is that such a subsidiary would function as a separate entity from its foreign parent, for accounting purposes. It would "buy" its products from its foreign parent, paying "prices" that supposedly represent costs, but which are fundamentally unverifiable as far as the IRS is concerned. Thus the parent firm is in a position to inflate such figures with impunity, and winds up with higher real profits than its U.S. competition despite the fact that its reported profits will be about the same. Even a "windfall profits" tax on oil producers would fall more heavily on U.S. firms than upon their foreign-based competition, for precisely this reason.
In summary, business taxes are exactly what they are said to be: taxes on business. They have precisely the effects that they are intended to have: they reduce profits, thereby in effect levying a tax burden on shareowners by lowering dividends. As intended by their proponents, they transfer the tax burden from lower and middle income people to upper income people, since such individuals own proportionately larger numbers of shares of stock. "Soak the rich" is the intent, and also the effect.
Mr. Johnson replies: I think Mr. Jones overlooks the obvious, that we are not talking only about income taxes or graduated income taxes, we are also including all forms of excise taxes, sales taxes, transport taxes, property taxes, and other varied and often imaginative taxes which the establishment can conjure in its insatiable thirst for money.
I would suggest that Mr. Jones examine his telephone bill and note the excise tax he pays (a "temporary" wartime tax, by the way), or investigate the cost of his liquor, tobacco, if he uses them, and his gasoline at the pump, to see how much of that is taxes. Although I am no economist, I do know that to the extent that the total cost of telephones, liquor, tobacco and gasoline appear in my cost of doing business, my prices must be proportionately higher than did I not have to pay these things.
If my sales are $100,000 and my cost of sales of $100,000, I don't make any profit. Now granted, I will have no income tax to pay, but suppose the establishment now comes along and says I have to pay, say, a corporation fee of $5000 henceforth whether I make any profit or not. Am I going to absorb that as a loss? Certainly not—I will boost my sales accordingly in relation to my cost of sales, by increasing prices if the market competition permits this, or by cutting costs and possibly cheapening my product, or else I will go out of business.
If an after-tax profit of 5% on gross sales is customary for my industry, then if my cost of sales if $100,000, my sales must be around $110,000 if I am to hand over half of my pre-tax profit to the government and still have 5% of gross sales left. Now without all of the many taxes included in my cost of sales, this might be as small as $80,000, and without having to hand over half of my net to the government, I could lower my prices to reach sales of $85,000 and still have the same $5000 net I had originally.
The businesses I sell to could do the same thing, and the net result would be a considerably lower cost to the consumer, because each business is setting prices sufficient to produce an acceptable after-tax profit. While it is true that the after-tax per share earnings—earnings on invested capital rather than on gross sales—is a more widely used yardstick, the company that shows only a fraction of one percent after-tax earnings on sales is dangerously close to a big loss in any business recession regardless of their earnings per share.
Mr. Jones is correct that we are immersed in the world market, and taxes on our own businesses cannot always be compensated for in terms of higher prices. What happens here is that imports become cheaper, and our foreign trade balances suffer, or else the American business takes flight into foreign subsidiaries or affiliates. The point is, the American company will take what action it must to avoid the taxes; it certainly doesn't simply absorb them.
The idea that American Industry is owned mostly by upper income or wealthy people, as Mr. Jones suggests, is not supported by the facts. Study of the Statistical Abstract of the U.S. will show that the 5.7-million persons with estates over $100,000 only own 23.5% of the total value of stocks on the New York Stock Exchange. Of the 30,850,000 shareholders in the U.S. only 4,437,000 or 14.38% have incomes over $25,000 annually. This does not include many millions whose pension, retirement, or union strike or unemployment funds or life insurance is also invested in the common and preferred stock of American industry.
One of Parkinson's Laws is "expenditures rise to meet income"; tax revenue that is easily obtained by taxing businesses which don't vote is just as easily spent. I stand by the original proposition: a completely tax-free, unregulated, uncontrolled atmosphere in new energy sources, with ample competition, is what we need to solve the energy problems we face today. —R.W.J.
On reading the April issue, I was struck by the contrast between the magnificent humility and tolerance of Leonard Read and the shrill arrogance of Mike Dunn's letter in the same issue.
Certainly, libertarians should establish a separate identity. Similarities between libertarianism and conservatism arise mainly because closet libertarians within the conservative camp have converted conservatives on many issues. Consider David Brudnoy's article on gay rights in National Review, or Dick Cowan's blockbuster on legalizing pot, or my own editorial efforts on economic liberty. I don't see anything deplorable about all that, nor about doing the same thing within the liberal and populist media. They can keep on calling themselves anything they like, so long as they are drawn toward a libertarian position.
National Review has always been deliberately schizoid, embracing Burkean traditionalists like Russell Kirk along with libertarians like Bill Rickenbacker, Frank Meyer, Max Eastman and Karl Hess. For a long time, of course, the editorial staff was dominated by former Communists, which accounted for much of the anti-Communist feeling of the time (I confess that I still regard Maoism as the antithesis of libertarian society). It is factually incorrect to treat "conservatism" in America as if it stood for any monolithic program, fixed throughout eternity. It has long been little more than an extremely broad forum for dissent. Robert Taft, for example, hardly fit the stereotype of "fascist imperialist" (it seems that I've heard that song before).
Mr. Dunn would have libertarians stress irreverence and excitement, apparently meaning peripheral issues like legalization of dope, porn and hookers. Living near New York, I didn't realize that such activities were illegal. In any case, the issues are really quite dull. Legal markets are so encumbered with taxes and regulations that the affected industries would be smart to lobby against legalization. It is axiomatic that "black markets" are quite efficient, and legalizing sin would just give Leviathan a windfall source of enormous new taxes (Henry George was wrong: the single tax is most feasible on sex).
Over the past year, I have suffered quietly through letters in REASON suggesting that "we" drum Murray Rothbard out of the movement for his position on feminism, Ayn Rand for her views on ecology, David Brudnoy for having the guts to air strong libertarian views in conservative journals, and Steve Symms just for the hell of it. I even tolerated a New Jersey Libertarian Party requirement that I sign a loyalty oath. But the purge dirge is getting out of hand. Next, I suppose Leonard Read and the whole F.E.E. bunch will get the axe for being religious. Does it really corrupt their work all that much? Does it really matter?
By labeling everybody else as "conservative," and then saying "it is ridiculous to think that conservatives have anything to teach libertarians," Mr. Dunn manages to have all the answers. He also manages to arrest whatever intellectual development might otherwise have begun some time in the distant future. We have Ralph Nader to tell us what THE LIBERTARIAN really is. Why bother to study? "Libertarianism has almost exhausted the fields of politics and economics," according to Dunn. Well, after 15 years of studying (including a few books Mr. Dunn would surely burn), I am exhausted. So is Leonard Read. But the fields are barely tilled.
In the fifties, I wore a label on the back of my jacket: "Ladds of West L.A." Dunn just wants to monopolize the franchise on Libertarian jackets, so you can tell the good guys from the bad guys without listening to what they have to say. After all, we already have all the answers. No wonder Leonard Read is wary of his own label. The information market can separate solid information from useless ramblings, and judging from the fame of Messrs. Dunn and Ramsey, they aren't surviving the market test.
Alan Reynolds is an Associate Editor of National Review. —Editor.
In reply to Mike Dunn's letter in the April issue, I consider myself a conservative, but I certainly don't recognize his definition. Conservatives advancing Fascism: What, really, is the difference between fascism or socialism, Communism? The only part of his definition that we might be guilty of is Cultural Authoritarianism, because we do believe in tradition.
He must be referring to the classical definition of conservatism which clung to the status quo, while the liberals were for less government and more personal freedom. The definitions have been completely turned around now, with the liberals clinging to the status quo, statism or socialism and trying to push us farther in that direction, while the conservatives want to go back to where government had very little control over the economy and people had much more personal freedom than they have now.
If libertarians are ever going to broaden their base and win elections, it will be necessary to make some compromises. I doubt if you could get two libertarians together and they would agree on everything.
I find nothing in my conservative philosophy which prevents me from supporting most of the libertarian aims as I understand them from reading REASON.
In the letter published in your February issue, I pointed out that, in the context of a government monopoly on water supply, there was no way to provide non-fluoridated water to those who preferred it without depriving others, including myself, of the opportunity to enjoy our preference. Since both sets of preferences could be satisfied, without conflict, in a free market, I suggested that it would be more appropriate for libertarians to fight against the government water monopoly than to try to impose our different preferences on each other. This elementary point appears to have gone over the heads of some readers, including the two whose letters appeared in the May issue. Having renounced attempts to impose my preferences on them, I was answered by vehement attempts to justify their efforts to impose their preferences on me. What are their arguments?
First, it is alleged that as an adult I can have no real interest in fluoridated water, since fluoridation only benefits children. It is true that the benefits of fluoridation have been demonstrated only in the case of children: for technical reasons, the same effect in adults is more difficult to demonstrate with certainty. But absence of proof does not constitute proof of absence. In quantities used for fluoridation, which are so minute that higher concentrations of fluorides often occur naturally in spring water, the fluorides can do no harm. The mechanism of tooth decay is likely to be the same in adults as in children, and it is likely that the fluoride may do some good, even for adults. The rational decision in such a case is obvious.
Second, Dr. Yiamouyiannis claims Baltimore has a high rate of tooth decay in spite of fluoridation since 1952. But tooth decay rates depend on carbohydrate consumption as well as the availability of trace fluorides. Baltimore, like other cities, has experienced an increase in the proportion of poor people among its inhabitants—and the poor eat more carbohydrates. How about some data from communities where carbohydrate consumption remained stable for the duration of the test? Or is Dr. Yiamouyiannis afraid that his argument would disappear in the presence of appropriate experimental control?
As for Dr. Rothbard, he should be reminded that analogy is no substitute for logic. It is a violation of rights to deprive a person of the opportunity to buy a commodity, such as fluoridated water (or unfluoridated water) which would be available in the context of a free market. Given consumer preferences expressed in past votes on fluoridation, I would guess that the demand for fluoridated water would exceed the demand for unfluoridated water—and in a free market, entrepreneurs would proceed to satisfy that demand. Can anyone imagine a market for the "service" of forcing people to take aspirin on the sidewalk? Rothbard's analogy—forgive me, readers—won't hold water.
Yet, while I could not let fallacious arguments go unanswered, I would not try to impose fluoridation on anyone else. I hope, in turn, that those libertarians who prefer nonfluoridated water will desist from trying to deprive me of what I prefer, and will work instead to get the state out of our lives and out of our water supply. The statists' strategy is to create situations in which coercion is taken for granted, and only the identity of the victims is open to question. That way the victims will fight each other instead of fighting the state. Fluoridation is not the only issue on which libertarians have "taken sides," without stopping to realize that they were diverting their energies from a far more important battle.
We cannot win if, instead of fighting against state control of water systems, we waste time arguing about fluoridation. We cannot win if we argue about censorship of schoolbooks, instead of fighting against state control of the schools. We cannot win if we argue about the relative benefits of being ruled from city hall or from Washington, instead of fighting together against the idea that any majority, in the world or in the neighborhood, is entitled to abridge any individual's rights. If we follow Rothbard's advice and agitate against particular government actions that displease us, knowing well that the most likely result of such agitation is just another shift of victimization to others, "pending that happy day" when political coercion will cease, then the "happy day" will never come. So let us leave fluoridation and decentralization and pornographic schoolbooks to people who have nothing better to fight for or against. We have an important job to do. We can do it, if we remember who we are doing it on.
Adam V. Reed
New York, NY
This article originally appeared in print under the headline "Letters".