Friday, July 16, 2010

Statist Fundamentalism

“Market fundamentalism” is the belief that a pure free market would succeed in providing the goods wanted by people with equity, sustainability, and efficiency. Those who believe in market failure use the term in a negative way, the way atheists look down on religious fundamentalists. Critics of free markets believe that market fundamentalists are mistaken, as they believe that the free market has failed and cannot possibly succeed.
In contrast, the term “statist fundamentalism” has had little use, even though statist fundamentalism is much more widespread than market fundamentalism. Indeed, I conjecture that most people are statist fundamentalists. So it’s time to lay out what that means.
First, one has to define “free market” in its purity. A pure free market is an economy in which all human action is voluntary. A governmental intervention is a law or policy that alters what voluntary action would otherwise do. An act is voluntary if it does not coercively harm others. Thus a pure free market would have no restriction or tax on honest and peaceful production, trade, consumption, and produced wealth.
A truly free market would exist in either in peaceful anarchism or else under a government that protects property rights. In a completely free society, public revenue comes from user fees, compensation for damage such as pollution, and ground rent. Tapping land rent for public revenue does not interfere with production, and is consistent with property rights when we agree with the natural-law philosopher John Locke that the earth was given equally to all humanity.
“Statist fundamentalism” is the belief that a pure free market is severely inefficient, unjust, or has outcomes that are unsustainable. Usually, statist fundamentalists believe that free markets fail in all three outcomes.
Statist fundamentalism is based on three errors. First, statist fundamentalists confuse the mixed economy, the interventionist system of today, with free markets. Secondly, statist fundamentalists believe that interventions have little effect on economic outcomes. Third, statist fundamentalists do not understand economic theory in its totality, and they do not understand the concept of freedom.
The first fallacy is evident in the claim by statist fundamentalists that oil spills, the boom-bust cycle, unemployment, and poverty provide evidence of market failure. The implication is that today’s governments practice laissez-faire, with unconstrained free markets. This overlooks the actual interventions that governments impose: massive taxation, restrictions, and subsidies.
The claim that there are free markets also overlooks the fact that in most economies today, a substantial amount of the output, in some cases over half, is from governmental provision. We have had mixed economies, mixtures of markets and government. In all countries today, a key economic resources, the money, is provided and controlled by governmental central planning.
When confronted with the fact of intervention and governmental provision, statist fundamentalists claim that these have little negative effect. Statist fundamentalist believe that the tax system just takes money from people, with little effect on economic activity. They believe that regulations are minor, of little consequence. They argue that subsidies are mere transfers of money, and do not affect how markets work. That is why they advocate higher taxes and more restrictions, since they think it will do good without having any significant negative consequences.
The belief by statist fundamentalists that interventions have little effect implies that they do not understand both economic theory and the concept of freedom. Some statists believe that slavery was a free-market institution, not understanding that “free market”means freedom for all human beings. Statist fundamentalists believe that cheating, stealing, kidnaping, and trespass are all part of the market, no understanding that liberty means free from coercive harm.
Contrary to the beliefs of statist fundamentalists, a pure free market does not mean “anything goes.” The free market is based on ethical freedom, and theft, including fraud, as well as force, are outside the market, violations of market property rights.
In their misunderstanding of economics, statist fundamentalists believe that a pure free market would be plagued with high amounts of pollution, there being no regulations against it. They overlook the fact that pollution that invades the property of others is trespass, a theft of other’s property, and in a truly free market, polluters would have to compensate for the damage.
The claim by statist fundamentalists that markets fail to provide equity also shows their lack of understanding. The rule of the market is, to the creator belongs the creation. This applies equally to all persons. Equality also implies to what human action has not created, namely the land, and the benefit of land is its market rent. There is equity when land rent is shared equally and creators keep their creations. A pure free market is inherently ethical and equitable.
Since statist fundamentalism is based on fallacies, the correction of these fallacies implies that its opposite, market fundamentalism, properly understood, is based on sound logic and evidence. The fundamentals of ethics and economics imply that market fundamentalism is true and statist fundamentalism is fundamentally mistaken.

Tuesday, July 06, 2010

Taxic Waste

The term “taxic waste” is not yet in economics dictionaries. Although “taxic” has been used with various meanings, world-wide-web search engines ask if you really mean “toxic waste.”
The term “taxic” is used in medicine, “taxic drug action” meaning a drug that has the same effect when more diluted. In biology, a taxic response is a movement in cells or micro-organisms response to stimuli, such as moving away from light. “Taxic” is also used in relationship to taxonomy, the science of classifications such as types of organisms. A “taxon” is a group of organisms which are analyzed to be one unit such as a species, the plural being “taxa.”
The Greek term “taxis” means an arrangement. The economic term “tax” derives from Latin “taxare” meaning to assess, related to “tangere” meaning “to touch.” There were no taxes in England until the Frenchified Normans invaded in 1066 and introduced the word “tax.” Instead, the English farmers had paid rent to the lords and tolls for passage.
We could solve our economic problems - depressions, budget deficits, and congestion - by returning to the ancient English system of having only rents and tolls. We could abolish not only the policy of taxation but also make the term “tax” obsolete. But so long as the status quo rules, and we are infected, plagued, and poisoned with taxes, the term “taxic waste” is appropriate and apropos.
The American economist Henry George provided a taxonomy of taxation, distinguishing taxation in form and taxation in substance. A tax in form is a compulsory payment to government which in substance is compensation for damage or a fee to use a resource or service. Thus, a pollution tax is a tax in form but not in substance, since the polluter would pay the same charge if his toxic waste invaded the property of a private owner. When the pollution invades the property of the people, such as the atmosphere, government can act as the agent of the people to collect the damage compensation in the form of a periodic tax in form.
A tax in substance is an imposed payment unrelated to any specific benefit. When you buy shoes and pay a sales tax, there is no specific government benefit associated with the act of buying the shoes. The tax is based solely on the ability to pay, or the government’s ability to extract.
The taxon of taxes in substance impose a toxic taxic response from the economy, creating costs beyond the revenue paid to government; hence this is called an “excess burden” and a “deadweight loss.” These costs, losses, and burdens are taxic waste. The waste can be idle resources, such as unemployed labor, empty offices, and idle factories. It can also be the misallocation of resources to uses less favored than what people would have otherwise obtained. For example, a high sales tax on cars may shift one’s income to riding taxis or buying an ugly old smog-belching car instead of a shiny new gas-efficient vehicle.
The taxic waste has been measured as being over ten percent of total income, and over time, it reduces economic growth, so that societies world-wide would today be much richer if they had not been dragged down by deadweight losses. You can learn the fulls details on taxic waste in the book The Losses of Nations: Deadweight Politics Versus Public Rent Dividends.
We can eliminate taxic waste more easily than the toxic waste such as the oil spill in the Gulf of Mexico. Replace taxes on wages, capital, trade, production, and sales, with the taxon of only taxes in form, such as on pollution and land rent, in addition to congestion tolls and user fees.
While economically feasible, shifting taxes to those only in form is politically difficult. The public does not understand the economics of taxation, and powerful rent-seekers pay candidates to subsidize their land value. The landed interests make property taxation unpopular by billing real estate taxes twice a year in big visible payments, rather than as monthly payments that could be budgeted along with utility bills, or even deducted from paychecks as are income taxes.
Because land rent is a pure economic surplus, tapping the land value for public revenue would not even burden the landowner after the transition, since the price of land would fall to a tiny amount, just enough to facilitate the real estate market. A tax on land value replaces what a new buyer would otherwise pay as mortgage interest.
A tax on land value does not change the economic rent of land. If a landlord was charging the rent the market could bear, a tax only on the rent or land value would not change what the market could bear, since the tenant’s benefit of the space would be unchanged, and the supply of land would not change. Thus a land-value tax is not passed on to tenants.
The toxic waste from the oil spill in the Gulf of Mexico is causing tens of billions of dollars in damage, but the taxic waste of taxation imposes trillions of dollars of economic damage annually. Depressions, unemployment, and big budget deficits are economic pollution caused by taxic waste. Only when people finally understand this will they get economically aroused and demand an efficiency tax shift to eliminate taxic waste.