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Our Statist Economic Woes

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Imagine that people in society own a total pool of wealth of $1 million. The group is divided into three categories — the poor ($50,000), the middle class ($250,000), and the rich ($700,000).

The entire group as a whole produces an annual income of $100,000, divided proportionately between the 3 categories.

The government decides to levy a flat tax of 3 percent on everyone’s income to cover such core government services as police and courts.

Thus, everyone — poor, middle class, and rich — are keeping 97 percent of their income. Let’s say, hypothetically, that they spend 75 percent of their income and save 25 percent of it. That 25 percent of savings then adds to the overall pool of wealth, which then produces more income (through interest, investments, etc.).

Under our hypothetical, then, the overall pool of wealth is constantly growing larger and larger. The people are earning income and are free to keep it. And each person’s portion of the overall pool of wealth is producing wealth.

Enter the statists. They see all that income and wealth and the soaring growth of the pool of wealth and exclaim, “This is horrible. There shouldn’t be disparities of wealth. It’s not fair that some have more when others have less. Take from the rich and give to the poor.”

Of course, the statists never ask the critical question: How did the pool of wealth get there in the first place? They just assume that the pool of wealth was always there, will always be there in the future, and will always get bigger.

The statists take control of the government and change the country’s economic system from one of free enterprise to one of socialism. From now on, the primary purpose of government will be to tax those who have income and wealth in order to give money to others, after deducting a certain percentage to pay the salaries of the government officials who are performing this service.

The statists impose a higher tax — say, 10 percent, on the income of the rich. At first, these are happy days for politicians and bureaucrats. The rich continue to work hard producing wealth, and everyone glorifies the politicians and bureaucrats as good, compassionate, selfless saints who are helping the poor, needy, and disadvantaged.

Over time, however, everyone among the poor figures out that the state is giving out “free” money to the poor. More and more of them line up for the largess. The politicians and bureaucrats notice how grateful the poor are for the “free” money, especially on election day.

Meanwhile, some of the rich — those whose businesses are operating on the margin — go out of business as a result of the higher taxes. Moreover, some of the rich decide that it’s just not worth it to continue working hard to produce wealth, especially since they already have enough to retire. They close their businesses and live on interest from their savings.

The closure of businesses results in many more of the poor and middle class now being unemployed. And these newly unemployed people are well aware of the “free” money that the government is doling out. They line up for their share of the largess.

Over time, the recipient class — those on the dole — continues growing while the producing segment of society — the taxpaying sector — continues to shrink.

That doesn’t dissuade the politicians and bureaucrats. They’re not about to start cutting the dole. That would upset the dole recipients who have come to believe that they’re entitled to the “free” money for as long as they live. And what politician or bureaucrat wants to upset a voter by cutting off his dole?

So, the politicians and bureaucrats expand the income taxes to the middle class, which then exacerbates the problem by running marginal middle-class companies out of business. Thus, the welfare lines continue to expand and the pool of people to tax continues to shrink.

Finally, it gets to a point that the amount of money the state needs to give to people on the dole has grown so large that, combined with expensive foreign military adventures that the statists have gotten the nation into, it becomes necessary to greatly increase income taxes on everyone.

But the politicians and the bureaucrats know how angry that’s going to make everyone, so they simply go out and borrow the money to cover the difference.

Each year, the situation gets worse and worse. More people on the dole, more foreign military expenditures, more bills and expenses, more debt.

To relieve the problem, the statists cry, “Tax the rich! Tax the rich! This is all their fault.”

But the politicians and bureaucrats know that as they continue to raise taxes on the rich, each year there are fewer and fewer rich to tax.

Finally, faced with enormous financial commitments and buried under a mountain of debt, the politicians and bureaucrats decide to levy taxes on the overall pool of wealth. They begin with 10 percent, but soon discover that that’s not enough. The next year, in addition to income taxes and more debt, they take another 10 percent of the overall pool of wealth.

Thus, now the overall pool of wealth in society is diminishing — $900,000, $800,000, $700,000, which means a lower return on capital for the owners.

Finally, things get so bad that most everyone is trying to get in on the largess — the “free” money — seniors, sick people, poor people, farmers, students, communities, the military, foreign regimes, and countless others.

On the tax side, the number of people able and willing to pay the taxes that maintain the dole recipients continues to shrink.

The whole system starts to cave in on itself. Too much spending and debt and not enough private sector to sustain it. In the midst of the crisis, the government seizes everything and takes over complete management of the economy, giving everyone a job with the government. Full, guaranteed employment at last! And everyone is equal in the sense that everyone is equally poor.

That’s what the welfare/warfare state has produced in Cuba and North Korea. It’s where Greece is heading. It’s where the statists are taking the United States.

There is but one solution to this statist morass, and that solution is libertarianism.

Forget about trying to fix the welfare-warfare system and trying to make it work. Instead, repeal all the welfare-state programs and all the warfare-state programs, and repeal the income tax, capital-gains tax, and inheritance tax.

Leave people free to engage in economic enterprise without government interference, leave people free to accumulate unlimited amounts of wealth, and leave charity entirely to the private sector.

Only by bringing an end to statism and a restoration of economic liberty can we enjoy a free, prosperous, peaceful, and harmonious society in our land.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.