defense analysis

A True Flat Tax

REVISED 08/30/10

Don Boudreaux writes:

I do not grant that government’s decision to refrain from taking X‘s money means that government subsidizes X. The tax-exemption might be unwise policy, and it might be unfair (by some plausible guideposts) – and it almost certainly gives the tax-exempt organizations an advantage that they would otherwise not possess.

But tax-exemption does not involve taking money from Y and giving it to X. That fact is vital.

I’m not so sure.

The reason I’m not so sure is that “tax-exemption … almost certainly gives the tax-exempt organizations an advantage that they would otherwise not possess.” In other words, X‘s revenues are greater than they would be absent X’s tax-exempt status. By the same token, Y‘s revenues are less than they would be absent X‘s tax-exempt status. It may be true that X’s greater revenues do not accrue as profits, but they do accrue in some form. For example, in the defense-analysis industry, with which I am familiar, the employees of tax-exempt organizations — known as federally funded research and development centers (FFRDCs)– enjoy more luxurious offices; higher compensation, mainly in the form of benefits (e.g., more vacation time, larger company contributions to health insurance premiums, better retirement plans); and more stable employment (because FFRDCs operate under long-term, sole-source contracts that tend to be renewed decade after decade). The benefits that accrue to X‘s employees because of X‘s tax-exempt status are, in effect, a subsidy paid by Y‘s shareholders and employees.

Another way to look at it is this: In a balanced-budget world, the cost of government would be defrayed entirely by tax revenues. Given a government of a certain size, the exemption of some firms from paying taxes requires that other firms’ shareholders and employees pay higher taxes. That is a subsidy, if I ever saw one.

Going one step further, consider the proper function of government, which is to protect the lives, liberty, and property of citizens. It is none of government’s business what a citizen does when his life, liberty, and property are secure, as long as he doesn’t use it to impinge on the lives, liberty, and property of others. Whether a person makes a billion dollars a year or one dollar a year is really not the government’s concern, nor is it the government’s concern whether a person lives in a castle or a cardboard box. Such things, if they are of concern to anyone other than the person in question, are of concern to that person’s family, friends, neighbors, private charities, and so on.

It follows that government has no proper claim on the amount of income or wealth that a person acquires through the legitimate use of his liberty (such as it is). Warren Buffet and Bill Gates owe the government no more than a panhandler. Buffet and Gates simply have made better use of the protection afforded them by government, at least with respect to the acquisition of income and wealth.

The proper level of taxation, therefore, is that which defrays the cost of the governmental functions which protect the lives, liberty, and property of citizens: defense, courts, and law-enforcement. The cost of those functions is about $3,000 a year for every person aged 21 and older.* Everyone (21 and older) whose annual tax bill includes more than $3,000 for “liberty” services is subsidizing everyone (21 and older) whose annual tax bill for the same things is less than $3,000. All taxes for other services, regardless of who pays them, are forms of theft.**

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* The annual cost of national defense, the courts, and law-enforcement agencies is about $600 billion. That amount, divided by 200 million (the approximate number of persons in the United States aged 21 and older) yields an annual per-person cost of $3,000. I exclude persons under 21 because most of them still depend on adults for their subsistence, and have not yet advanced to the stage of making the most of the protections afforded by government.

** Some taxes underwrite regulatory functions, which are counterproductive. Some taxes underwrite services that are used by varying percentages of the populace (e.g., parks, highways), which (a) burdens those taxpayers who do not use the services in question, (b) subsidizes those taxpayers who do use the services in question, and (c) substitutes inefficient, unresponsive political-bureaucratic entities for more efficient, more responsive private firms. A large proportion of taxes (especially for Social Security and Medicare) simply take money from workers and give it to non-workers — an open-and-shut case of theft.

The National Psyche and Foreign Wars

I belong to a Google Group whose active members are retired scientists, engineers, mathematicians, and economists — some in their upper 80s — who worked on defense issues from the 1940s to the 2000s. The issues ranged in scope from devising improved tactics for naval, air, and ground operations to assessing the costs and effectiveness of proposed new weapon systems.

Most members of the group were government employees and/or employees of government contractors. Their attraction to government service — and its steady and rather handsome paychecks — derives, in good part, from their belief in the power of government to “solve problems,” and in the need for government to do just that. It is only natural, then, that many members of the group hold an unrealistically exalted view of the power of quantitative methods to “solve problems,” while holding naive views about the machinations of government, human nature, and history. (The pioneers of military operations research in the United States, by contrast, were realistic about the relative impotence of quantitative analysis of complex, dynamic processes.)

Here, for example, is a slightly edited exchange I had with an older member of the group:

Older member (OM):

Does anyone know whether the people of the U.S. were as little involved in the Indian Wars and the opening of the west (some would say stealing) as we seem to be involved with the wars in the Middle East and South Asia.

The greatest asset of our military is its “can do” attitude. The greatest weakness of our military is its “can do” attitude.

Me (Thomas):

I’m not sure what it means for a people to be “involved” in a war. If by “involved” you mean the popularity or unpopularity of the various wars, I have no relevant facts to offer.

But the transient popularity or unpopularity of a war (or any governmental action) shouldn’t matter. If public policy responded to the whims of the “man in the street,” we would be in deep trouble. That’s why there are prescribed processes for making governmental policy. Following the processes doesn’t ensure wise policies, but it beats the alternative of capricious governance.

Our present wars were duly authorized by Congress, and are funded by appropriations made by Congress. Given that the members of Congress are elected representatives of the people, then the people are as involved as they can be under any sensible system of government.

As for the military’s “can do” attitude, decisions about going to war — and staying at war — are the province of civilian authority. When given a war to fight, the only sensible way for the military to approach it is with a “can do” attitude. Does the military’s “can do” attitude color the advice it gives when civilian authority is considering whether to go to war, how to prosecute a war, and whether to persevere in a war? Or are military leaders duly cautious in the advice they give civilian authority, knowing the consequences for their troops and the nation if a war goes badly? I haven’t been close enough to the “inside” — nor have I read deeply enough into military history — to essay answers to those questions.

OM:

I wanted to go a little beyond what might be called the legalities and into the national psyche. The decision to go to war is an awesome political and moral  decision. It has often been said that “old men send young men to war”. In our modern adventures only a fraction of the Country has other than a remote financial involvement in our wars. A small fraction of our Legislative Branch have direct Military Service experience (the smallest in history). An even smaller number has sons or daughters in the Armed Services. We are much moe detached than when the Signers of the Declaration of Independence pledged their honor, their fortune, and their good right hand. (Quote not quite accurate).

During the Vietnam War the Country lowered its support as the costs and casualties rose. Now we do not have the draft though even so military leaders warn the political entities that we must not lose the confidence of the people even as we seem to drift away from the “Powell” Doctrine. We certainly see the heavy imprint of the Military-Industrial Complex against which President Eisenhower warned. (That speech is still on Wikipedia).

During Vietnam we had the bugbear of the “Domino Theory”. There are some who argue along those lines now regarding threats to Israel and other major American Interests. Can a small special interests group lead American policy?

I was wondering what other precedents in American History might apply. Most of the 19th Century was dominated by America’s Manifest Destiny (and losses were modes). Then came the War to end all wars. Then the Era of Good Feeling punctuated by the Washington Naval Conference, the Great Depression, and then the rise of Nazi Germany and its Axis with Italy and Japan. Have we found a bizarre combination of of Depression and Manifest Destiny with a liberal dose of hubris as we dismantle our Navy having already essentially worn out much of our Armour and still at the mercy of land mines and IED (a form of landmine).

One parallel that seems to track from the 19th Century is the corruption of the Suttlers [sic] that has transformed nicely into the Military Industrial Complex.

Thomas:

I have great difficulty with the concept of “national psyche,” and thus with generalizations about what “we” (as a nation) have done and should do. I cannot describe my own psyche, let alone the psyches of millions of other Americans, dead and alive, who differ from me (often greatly) in nature and nurture.

In any event, you come close to answering your own questions in your third paragraph, where you ask “Can a small special interests group lead American policy?” My answer is a resounding “yes.” Two, relatively small, interlocking groups of strong-willed individuals were responsible for the Revolution and the Constitution, and those groups were bound by two special interests (at least): independence from Britain (not a universally popular idea at the time) and freedom from Britain’s interference in the colonies’ commerce. (The second interest is a “bad thing” only if one view commercial interests as a “bad thing.” Unlike the historians of the Beard school, I do not.)

Various and shifting coalitions of special-interest groups have determined the foreign and domestic policies of the United States government from its beginning, and always will do so. There is no escape from such an arrangement, given our system of government — the “legalities” to which you refer. Those “legalities” — and the absence of a national psyche which somehow translates the consolidated wisdom of “the nation” into governmental policy — make it inevitable that governmental policy will be the product of various and shifting coalitions of special-interest groups. You (I mean the generic “you” and not you, [OM]) may like the resulting policies in some cases (e.g., if you are a fan of British-style health care you will consider Obamacare a great leap forward) and dislike them in other cases (e.g., if you are an opponent of foreign wars except those that in retrospect seem worthwhile, you will generally oppose foreign wars).

The “dismantling” of the Navy to which you refer is the specific policy of a specific administration (or administrations). It was not the policy of the Reagan administration, nor was it a policy of the Kennedy administration. And, I hope, it will not be the policy of the next administration. In any case, governmental policy toward the Navy is part of a larger set of policies, the combination of which is dictated by the complex interplay of various special interests and the particular psyches of elected and appointed officials. In the present case, the “dismantling” of the Navy arises from a particular view of how to defend Americans and their property and, not coincidentally, also makes certain kinds of domestic government programs more affordable. It should go without saying that the particular view of how to defend Americans (diplomacy, good will, lower defense budgets) finds opposition in millions of Americans’ psyches, as does the present administration’s commitment to various domestic programs. Liberal hawks — to the extent that they still exist — must be having a hard time digesting the present administration’s combination of domestic and foreign policies, just as conservative hawks — whose are legion — had a hard time digesting the previous administration’s combination of domestic and foreign policies.

As for the military-industrial complex, there is a coalition of interests that can be described broadly by that term, though it is a coalition fraught with internal conflicts and rivalries. If that coalition deserves blame for any excesses in defense spending and misadventures in foreign fields, it also deserves a large share of the credit for the outcomes of World War II and the Cold War.

Tip O’Neill said that all politics is local. I say that all political developments reflect the clash, compromise, and collaboration of special interests — and thus cannot be ascribed to a national psyche.