The federal government, on the other hand, relies on taxes to get its money. What is the difference between taxes and what private-sector businesses do? Force! The private sector’s method is based on voluntary action. The government’s method is based on forcibly taking money from people to whom it rightfully belongs.
Taxation and force
One of the most eye-opening revelations for me was reading a piece by Leonard Read, the founder of the Foundation for Economic Education (FEE), an organization that I would end up going to work for many years later. Read said, If you don’t pay your taxes, they will kill you. That was a real stunner for me.
Read was pointing out in a very real way the nature of the force on which government relies to get its money. If you refuse to pay your taxes, government agents will impose a lien on your house. The lien will be foreclosed and your house sold at a foreclosure sale. A court will issue a writ of possession to the new owner, which will be served on you by a team of well-armed deputy U.S. Marshalls. If you use force to resist the eviction, they will use force against you. If you use deadly force, you will ultimately end up dead.
One big question for me was this: Does the manner in which the government gets its money hold any significance, especially with respect to poor people in society?
The Wealth of Nations
In my search for answers, I discovered one of the most remarkable books ever written. It is titled An Inquiry into the Nature and Causes of the Wealth of Nations. It was written in 1776, the same year as the Declaration of Independence, by a Scottish philosopher named Adam Smith. The title of the book intrigued me, given my interest in wealth and poverty. I figured that the book might give me an answer, for example, as to why people in Nuevo Laredo, Mexico, were so much poorer than people in Laredo, Texas.
By that time I was living in Dallas. Through a recommendation from FEE, I contacted the head of the economics department at the University of Dallas, a man named Sam Bostaph. Sam was a libertarian and an “Austrian” economist. I asked Sam if he would tutor me in Austrian economics, and he responded by asking me to submit to him a list of books that I had already read. After perusing it he said, “I think we should begin with a study of fundamental economic principles by doing a chapter-by-chapter analysis of Adam Smith’s Wealth of Nations before we proceed into Austrian economics.”
I was ecstatic. Bostaph and I met once a week to discuss The Wealth of Nations. In my free time during the rest of the week I immersed myself in commentaries on the book that I found at the Southern Methodist University library.
Smith’s book is far from a simple read. One of the earliest treatises on economics, Smith’s writing is often turgid, muddled, and confusing. But what really inspired me was the title of Smith’s book. Why are some nations wealthy while other nations are poor? Was education the reason? Was it natural resources? Was it geographic location?
That caused me to embark on a search that led me to explore more deeply the works of free-market economists such as Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, Friedrich Hayek, Milton Friedman, Israel Kirzner, and others.
Like most welfare-state liberals, I believed that wealth in a society was a given. It never occurred to me to ask, How did that wealth get there? And why is it that all nations don’t have large amounts of wealth and high standards of living?
After studying the issues and reflecting on them deeply, I reached a conclusion that I knew would shock my leftist friends back in Laredo: The reason for the disparities of poverty and wealth in societies lies with the extent to which government taxes people and regulates economic activity. The heavier the tax and regulatory burden, the poorer the citizenry. The lighter the burden, the higher people’s standard of living will be.
The importance of capital
I learned that one of the keys to a wealthy society and rising standards of living lies in “capital” — that is, in the tools and equipment used by workers. When workers employ better tools and equipment, they produce more. A higher level of output means higher income for the owner, cheaper goods for consumers (owing to an increase in supplies), and higher wages for the workers.
In a free-market system — that is, one that is free of government interference — there is a natural harmony of interests of owners, employees, and consumers, a theme that would be developed in a fascinating book titled Economic Harmonies by a French free-market economist named Frédéric Bastiat, with whose works I had become familiar when I read those four little volumes of Essays on Liberty.
I learned that savings and capital are key to rising standards of living, especially for the poor. The more savings, the more capital. The more capital, the more productivity. The more productivity, the higher the wage rates and the higher the standard of living for people in that society.
Government hurts the poor
I learned that modern-day government measures purportedly designed to help the poor did the opposite. The best example is minimum-wage laws, perhaps second only to welfare as the most popular antipoverty program.
Minimum-wage laws are deceptively simple and superficially attractive. They entail government’s enacting a law that requires employers to pay a government-mandated minimum hourly wage to employees. The idea is that in the absence of the state-mandated wage, selfish, greedy employers pay no more than a bare subsistence wage to their workers.
The problem, however, is that there are inevitably going to be people whose labor is valued in the marketplace at less than the governmentally established minimum. For example, if a prospective worker’s contribution to a firm’s revenue is less than $7.25 an hour, the current minimum wage, he won’t be hired.
So, what happens to poor people who are locked out of the labor market because of a minimum-wage law? They go on welfare, where they live their lives dependent on the government dole and forever afraid that the dole might be terminated in the future.
Where does the government get the money to pay the dole recipients?
From taxes.
Taxation vs. prosperity
On whom are the taxes imposed?
On the people who are trying to save their money! To fund the welfare and regulatory programs, the government seizes money that would otherwise go into savings and productive capital, the things that are keys to higher standards of living, especially for the poor.
Needless to say, the matter is significantly aggravated when the warfare state requires massive taxation as well. The ever-growing, voracious needs of the welfare-warfare state devour the foundations of a growing, prosperous, and dynamic economy, and the people who pay the biggest price are the poor, the ones at the bottom of the economic ladder.
A correlative principle involves trade. In every economic trade, both sides benefit. That’s because the traders are each giving up something they value less for something they value more. Thus any law that interferes with freedom of trade is, to that extent, interfering with the ability of people to improve their economic well-being. Whenever I think about such things as tariffs, import restrictions, embargoes, and sanctions, I think about the adverse economic consequences, especially for the poor in both the United States and in other nations that are hit with such measures.
The utilitarian case against the welfare state, however, wasn’t the biggest reason I abandoned my commitment to this system in favor of libertarianism. It was the moral reason that captivated me most. From reading those four little volumes on liberty, I learned the importance of moral principles, especially with respect to their application to the welfare state.
It is fundamentally wrong for a person to take by force what doesn’t belong to him. It is also fundamentally wrong for a person to initiate force against another person for any other reason. The welfare state is founded on violations of both of those fundamental principles. The government forcibly takes money from people to whom it rightfully belongs in order to give it to people to whom it does not belong. It also initiates force to interfere with people’s right to engage in purely peaceful pursuits, especially trade.
I came to realize that we live in a consistent universe, one in which economic freedom is not only grounded in sound moral principles but also is the key to rising standards of living, especially for the poor. That’s why I ended up abandoning my commitment to the welfare state and embracing libertarianism.
This article originally appeared in the September 2013 edition of Future of Freedom.