Although most of our readers can argue the general case against compulsory taxation, there are times when it is necessary to fight specific new tax proposals. One such case concerned a recently proposed state income tax in Connecticut. Prof. D.T. Armentano's article (an earlier version of which was published there) is an especially good illustration of how to apply libertarian ideas to a specific case such as this.
In newspapers and on television, learned commentators recently urged the citizens of Connecticut to rethink the unthinkable: a state income tax. Their contentions are familiar ones.
We are told in persuasive language that our present taxing arrangements are inequitable and that we have almost certainly exhausted our existing tax base so far as additional revenues are concerned.
We are also told by at least some of the commentators that the most reasonable, equitable, and rational way to begin to solve our fiscal problems is to adopt a broad-based state income tax. An income tax, it is urged, can be made reasonably fair since it is grounded on "ability to pay," will not require frequent adjustments since increasing income or progressive rates will generate an ever-increasing flow of tax dollars, and is—for better or worse—the last major source of funding untapped by the state.
But however well-intentioned and high-sounding the scholarly rhetoric, these are not terribly persuasive arguments. In the first place, taxes based on ability to pay are not necessarily "fair" to those who hold that the criteria of tax suffering ought not to be one's ability to bear that suffering. A similar system in the rest of the economy would mandate that those who earn higher incomes would automatically pay higher prices for goods and services because they can afford to. Perhaps they can afford to, but it seems ludicrous to some of us to describe such policies as "fair." Fair to whom?
Second, whether income taxes require more or less frequent "adjustment" depends upon the type of income tax adopted and, more importantly, on the posttax "consumption" appetites of state politicians and vested political interests. Anyway, there is nothing particularly virtuous about high rates of taxation that are stable and adjusted infrequently. Indeed, as almost everyone is aware, it is not the instability of tax rates that gives cause for concern but, instead, the general highness of the rate of taxation itself.
Finally, indicating that the income tax is the last major source of revenue and therefore ought to be adopted is hardly an argument worth exploring. This is nothing more than the technique of the highwayman who, after having exhausted old victims, moves on to new ones. A pragmatic practice, to be sure, but hardly a "principle" that one would want to endorse as equitable or reasonable.
In conclusion, income taxes, like all taxation, rest on a shaky foundation indeed, and to pretend that income taxes are somehow more virtuous than other coercive levies (in the context of the real world) is pure foolishness.
Taxes, however, should not even be the focus of attention. They are only necessary because we choose to authorize increasing levels of governmental consumption. It is expenditures by government that make taxes "necessary," and increasing state expenditures that force us to consider new forms of taxation. Taxes are crucially important, but secondary. It is expenditures that are primary.
But here again we are told by trusted commentators that the state has a responsibility to provide needed and necessary public services. It is constantly argued that state agencies are operating as "efficiently" as possible but that an ever-increasing "demand" for services on the part of the "public" makes increasing state expenditures necessary. Indeed, most of the income-tax supporters see dozens of neglected and unfilled public needs that ought to be attended to by government. We have been neglecting the "public sector," these supporters claim, and must face up to our public responsibilities.
The evidence for this "neglect," however, is far from impressive. In the state of Connecticut, for example, during the period 1960-75, General Fund expenditures increased at an average annual rate of 13 percent. Even in the so-called austerity budget for the fiscal year 1974/75, budgeted appropriations for most state agencies were sharply higher than 1973/74 appropriations. For example, the Labor Department was budgeted a full 20 percent more; the Department of Commerce, 33 percent more; Historical Commission, 51 percent more; Regional Community Colleges, 19 percent more; U. of Conn. Health Center, 19 percent more; Department of Personnel and Administration, 28 percent more; etc.…Now these figures are hardly evidence that taxpayers have been niggardly or that the public sector has been slighted or has not received its so-called fair share.
More importantly, however, these vast sums of money have not, for the most part, been expended for any honest-to-goodness "public goods" or services. In an economically technical sense, the distinguishing features of a true public good or service are indivisibility and nonexcludability. Indivisibility means that the consumption of the good by one person does not diminish the possibility of its consumption by another. Nonexcludability means that once the good is produced, it is not economically possible to exclude others from its enjoyment.
Even a casual examination of state expenditures would reveal that the bulk of them do not meet or even approach these criteria. What state governments actually do is pay out public monies to private individuals for doing essentially private things to their own (or their client's) advantage. What we call the "public sector" is simply a convenient metaphor for a group of private interests.
Now we always generalize about these expenditures and describe them as "public" or, more persuasively, in the "public interest," yet this is a smokescreen to hide what is in fact occurring. The reality is that private interests—be they educators, consultants, doctors, builders, or whatever—under the rhetoric of public interest, have managed to acquire state funding for their most highly valued private projects or interests, of which they, as must be expected, are the primary beneficiaries.
Take "public education," for example (because it procures by far the largest "public" expenditure). In what sense is public education "public?" If there were a law banning it, individuals would simply choose to purchase as much or as little of the service "education" as they were inclined to and could afford. The service would be produced privately and sold voluntarily in the market to willing participants who would, presumably, have the most to gain from the consumption of the service. The only thing that makes public education public today is the compulsory school-attendance law and coercive taxation. Actually education is a private good masquerading under the "public" guise. The public is forced to pay dearly for a service whose primary benefits (higher lifetime earnings, for instance) are fundamentally private.
Thus the advantages of much "public" spending accrue to those to whom the service is given away. But advantages also accrue to another group of private beneficiaries—the practitioners. Having access to the public trough is to be preferred to open, free competition as far as the providers of these so-called public services are concerned. With such an arrangement, their psychic and money incomes are likely to be higher than they would otherwise be in a voluntary, competitive situation.
Once the real nature of government expenditures is understood, the actual operations of governmental agencies should come as no surprise. Governmental agencies are "inefficient" because the revenues to run them are derived, not willingly from customers, but by force from taxpayers. Moreover, the discipline of competition and the measuring rod of profit and loss are entirely absent.
While inefficiencies are rarely beneficial in a competitive world, they make excellent sense in a governmental world. They are, indeed, the manner by which governmental employees, contractors, and all private interests associated with the state reap the bonuses associated with public taxing and expenditures. Hence, there is no reason and no way for governments to be "efficient." As we have seen over and over again with governmental activity, expenditures will simply rise to exhaust tax revenues, and the fiscal crisis will be on-going—witness New York City. No level of taxation will ever be "enough."
What are we to do? To ease and eventually to end the difficulties, we must engage in a fundamental rethinking of the nature and scope of governmental activities. Specifically, we must stop funding those activities that are truly private. If the activities are private they ought to be produced and purchased privately in competitive markets. Where is the equity in having the bulk of the public pay for private goods that could, anyway, be produced more efficiently in the private marketplace? The present practice is both unfair and inefficient.
In addition, we must stop attempting to redistribute income to particular groups felt by political interests to be deserving. Income transfers are a privilege, not a right—the right belongs to the person who earned the income. Let the person that earned the income voluntarily decide whether particular needs are deserving or not. Since there "aint no such a thing as a free lunch," let's stop using the State to take lunches away from some to give to others. It is not charity, it doesn't work, and it's becoming horribly expensive.
In conclusion, proponents of a state income tax do a great public disservice when they hold out more taxation as a solution (or even as the partial solution) to our fiscal problems. As argued here, the root causes of the governmental crisis goes far deeper than any particular way of taxing and will not be cured by piling new taxes on top of old ones. The issue to be debated—the sacred cow of politics—is government expenditures.
The public, as usual, is far ahead of the politicians and academic intellectuals in this discussion. Listen to (or participate in) any private discussion of governmental spending. The public has had it with politicians. The public has had it with phony public "services." They have had it with promises of "efficiency" in government. They are tired of paying taxes so that some one else (usually with a higher income than the taxpayer) can consume the fruits of their labor. And their gut opposition to the income tax—ridiculed by certain commentators—is a logical and rational response to the almost total bankruptcy of governmental institutions.
When our elected representatives finally catch up to public thinking and begin to make the institutional changes necessary to reduce the burden of government, we may begin, at long last, to see the light at the end of the tunnel.
D.T. Armentano teaches economics at the University of Hartford. Residents of the Hartford area often read his commentary in newspapers or hear him speak at local gatherings. This article is adapted from one he wrote for the Hartford Times, June 22, 1975.
This article originally appeared in print under the headline "The Case Against New Taxes".
Start your day with Reason. Get a daily brief of the most important stories and trends every weekday morning when you subscribe to Reason Roundup.