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Taxes in the Electronic Global Market

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A recent issue of The Economist proclaimed “the disappearing taxpayer.” It acknowledged the difficulty governments are beginning to experience in taxing their citizens owing to two phenomena: the mobility of capital in the global marketplace and the shift of commerce to the Internet. The difficulty can only become more acute with time.

Advocates of big government fear these developments because they foresee nations competing to lower their tax burden in an effort to keep firms from moving away or to attract new ones. The so-called race to the bottom is abhorred by people who inexplicably equate high tax rates with progress. They also shudder to think that transactions over the Internet might go untaxed either because of anonymity or because of the lack of jurisdiction. Those who understand how inimical taxes are to freedom and prosperity take a different view and look on these developments with great anticipation.

Considering the ravenous nature of government, the last thing we should do is lose sleep over its inability to collect taxes. Europe is drowning in taxes (the French government takes half of GDP), and in the allegedly low-tax United States, the average person works till May 5 to pay all the tribute demanded of him. If globalization and technology can provide relief, we should be grateful.

But let’s not celebrate too soon. True, there are some good signs. Capital mobility seems to have acted to cap taxes on corporate profits. Sweden’s high personal income tax is causing companies such as the telecommunications firm Ericsson to think of leaving because of problems in attracting good people. Globalization seems to have restrained the growth in government spending in the 1990s. (Only the growth, not the absolute amount.)

Nevertheless, we must not underestimate the tenacity of governments or their will to maintain the gravy train. As competition drives down their ability to take wealth from producers, they will turn to an age-old solution, the restriction of competition. The effort to cartelize their operations will be called “harmonization” and will be presented as necessary to prevent governments from ruthlessly cutting tax rates to gain an advantage over others. If it hasn’t happened so far, that doesn’t mean it won’t happen eventually. Good reason, then, to avoid the sort of union of governments that characterizes western Europe. The consolidated megastate, even if it means freer trade, is not a good idea. What it mainly will do is erect the mechanism by which nation states will coordinate their efforts to milk the productive sector of society.

The upshot is that although competition among nations might put pressure on governments to cut and even abolish taxes, we can’t rely solely on that possibility. We need to find ways to internally restrain the politicians, whose appetite for other people’s money knows no bounds. We mustn’t be fooled by the perennial tax-cut talk that comes out of Washington. The cuts are typically meager and laden with conditions. You rarely hear talk about an unconditional lifting of the tax burden. Should anyone dare to suggest it, he will be shot down with the outcry: “How will you pay for it?” That, of course, is a bogus concern. The federal government takes close to 20 percent of GDP in taxes. How are we paying for the 80 percent it doesn’t take? It’s an absurd question. It’s not the removal of taxes but government programs that cost people money. The way to “pay” for the repeal of taxes is to repeal programs. Most of what government does is forcibly transfer wealth from producers to nonproducers anyway. That’s called theft.

The only way we will really restrain the policymakers is by way of a revolution in thinking. Early Americans were jealous of their liberty and thus rather tax-sensitive. A small tea tax made the citizens of Boston irate. The stamp tax more than irritated the American colonists. And it wasn’t just that they had no representation in the British Parliament. The new country that came out of the revolution managed to live with very low taxes for quite a while. We could use that tax-sensitivity again. It was good enough to start a great country. It might just be good enough to restore a country to greatness.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.