The Myth of Neutral Taxation

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[The
Cato Journal, Fall, 1981, pp. 519–564; The
Logic of Action Two
(Cheltenham UK: Edward Elgar, 1997,
pp. 56–108.

"A
neutral mode of taxation is conceivable that would not divert
the operation of the market from the lines in which it would
develop in the absence of any taxation."

~
Ludwig von Mises, Human
Action
(1949)

Economists
have long believed that government’s tax and expenditure policy
either is, or can readily be made to be, neutral to the market.
Free-market economists have advocated such neutrality of government,
and even economists favoring redistributive actions by government
have believed that the service activities and the redistributive
activities of government can easily be distinguished, at least
in concept. The purpose of this paper is to examine the nature
and implications of fiscally neutral government; the paper argues
that all government activities necessarily divert incomes, resources,
and assets from the market, and therefore that the quest for
a neutral tax or expenditure policy is an impossible one and
the concept a myth.

Structure
of the Free Market:
Consumers
and Incomes

To evaluate
the idea of a neutral government, we must first define what
neutrality to the market may be. Any firm or institution is
neutral to the market when it functions as part of the market.
That is, both General Motors and Mom and Pop’s Candy Store are
part of the market, and insofar as their activities remain within
the market, they are neutral to it. [1]

We may analyze
market institutions according to the following categories: (a) what
and how much they produce, and (b) how much and from where the institution
receives monetary funds. For every institution produces goods or
services and receives money.

There
are two types of market institutions. One is the business firm.
The firm is guided by its expectations of monetary income from
customers in payment for its products. The firm receives funds
from two sources: (b1) customer expenditures, and (b2) entrepreneurial
investments. Entrepreneurial investments are monies invested
in the firm to purchase or hire factors of production to make
goods and services to be sold to customers. The investments
are savings spent in anticipation of greater returns from selling
products to customers. Although the conspicuous resource and
production decisions in the market are made by capitalist-entrepreneurs
(by the owners of the firm and its capital assets) these decisions
are made in accordance with their expectations of monetary income
from customers. In short, businessmen are guided by the quest
for monetary profits and the wish to avoid monetary losses,
and their forecasting and anticipations must turn out to be
good enough to reap profits from their production decisions.
The intake of investment funds into the firm, then, is subordinate
to the expected profit to be made from sales to customers.

Business
firms and the structure of capital assets in the economy, as
Austrian school economists have shown, are not a homogeneous
lump: Production is a structure of stages, a latticework that
moves from the most "roundabout" processes of production
— the stages of production most remote from the consumers —
down to nearer processes, and finally down to the production
and sale of goods and services to the ultimate consumers.
[2]
The ham sandwich at the local coffee shop begins with
the mining of ore for tools and machines and the growing of
grain to feed hogs, and continues in stage after stage down
through the wholesale and retail stages, until it arrives in
the maw of the final buyer, the consumer. Thus, for our purposes,
we can short-circuit the structure and refer to the consumer
as the basic source of the income of business firms; ultimately,
it is consumer demand that provides profits or losses to business
firms and either vindicates or not prior production decisions
by investors.

Investments
that bring money into the firm in anticipation of consumer demand,
(b2), consist of two parts. The basic investment (b2a) is investment
by the owner or owners of the firm in the form of personal savings,
partnerships, or investment in corporate stock. Auxiliary investment
(b2b) are loans to the owners of the firm by other capitalists,
either in the form of short-term credit or long-term debentures.
The willingness of the firm’s owners to pay a fixed-interest
return to lenders is, of course, a function of their anticipated
profit in selling the product to the consumers. Willingness
to pay interest will always be less than or equal to the anticipated
profit rate; and in the long-run general-equilibrium world of
changeless certainty — a world that has never and can never
come into existence — the rate of return would be equal throughout
the market economy. In that world, the rate of profit in every
firm would be equal to the rate of interest on loans.
[3]

For market
firms, therefore, there is no mystery about the determination
of their production decisions and income. The former are determined
by firms’ anticipation of consumer demand, and the latter by
the reality of that demand. Hence, firms receive their income,
in the final analysis, from serving consumers. The more efficiently
and ably the firms anticipate and serve consumer demand, the
greater their profits; the less ably, the less their profits
and the more they suffer losses.

Finally,
the owners of the factors of production — land, labor, and capital
goods — receive their income in advance of production from the
investor-owners of the firm. The more ably and productively a
factor or factors are believed to serve consumer demand, the greater
the demand for those factors by the owners, and the higher their
income. Since capital goods themselves form part of the structure
of production, ultimately factor incomes consist of the income
from the exertion of labor energy (wages, salaries), the use of
land (land rents), and the transfer of money (a present good)
in exchange for anticipated future income (a future good) — that
will yield interest (or long-run profit) for time preference,
and entrepreneurial profits or losses. All these factor incomes
then, are tied to the efficient service of anticipated consumer
demand. [4]

Incomes
to factors and entrepreneurs on the market, therefore, are tied
inextricably to the effective satisfaction of consumer demand,
a satisfaction that depends on the successful forecasting of
the market conditions that will exist when and after the goods
or services are produced. Income to the firm and to factors
from consumers is linked inextricably to the satisfaction the
consumers derive. In a deep sense, therefore, income to producers
on the market reflects benefits to consumers.

The crucial
point is that when consumers spend, they benefit, because the
expenditures are voluntary. The consumers buy product X because
they decide that, for whatever reason, it would benefit them
to buy that product rather than use the money on some other
product or save or add to their cash balances. They give up
money for product X because they expect to prefer that product
to whatever they could have done with the money elsewhere; their
preference reflects a judgment of relative benefit from that,
as compared to another, purchase. In my own terms, spending
choices by consumers demonstrate their preference for one, as
compared to another, way of using their money. [5]

And that
is not all. The profit-and-loss tests of the market, the rewarding
of effective producers and forecasters and the punishing of ineffective
ones, ensures that the overall ability at any time of entrepreneurs
to forecast and satisfy consumer demands will be high. Good forecasters
will be rewarded with higher profits and incomes; poor forecasters
will suffer losses and finally leave the business. So that the
market tendency is toward a high level of fit between anticipation
and reality, and for a minimum of erroneous investment. Producer
income, therefore, reflects consumer benefit even more closely
than we might at first realize.
[6]

The second
type of market institution — after the business firm — is the
voluntary nonprofit membership organization: the bridge club,
lodge, ideological organization, or charitable agency. Here,
too, income and benefit are cognate. Income is no longer divided
between investors and consumers. All income is obtained from
members, either in the form of regular dues or systematic or
occasional donations. The purpose of the organization is not
to earn a monetary profit, but to pursue various purposes desired
by the income-paying members. In a sense, then, the members
are the "consumers," except that they consume the
services of the organization not by purchasing a product but
by helping the organization pursue its goals. The member-donors
are at the same time the consumers and the investors, the consumers
and the makers of the production decisions.
[7]
The organization will employ as much of its resources
as the member-consumer-donors desire to contribute to the pursuit
of their goals.

Membership
organizations, while clearly part of the market, are necessarily
limited in their scope, for they do not follow the division of
labor necessary for most market production. In virtually all other
cases of production, the producers and the consumers are not one
and the same: The producers of steel bars do not, Heaven forfend,
use up those selfsame bars in their own consumption. They sell
the bars for money and exchange the money for other goods that
they would like to consume. In the case of membership organizations,
however, the member-investors are the consumers of the service.

Even where
the explicit goals of the organization are to help non-donors,
this rule — that the consumers guiding production decisions
are the donors — still applies. Suppose, for example, the organization
is a charity giving alms to the poor. In a sense, the purpose
is to benefit the poor, but the actual consumers here, the guides
to production decisions, are the donors, not the recipients
of charity. The charity serves the purposes of the donors, and
these purposes are in turn to help the poor. But it is the donors
who are consuming, the donors who are demonstrating their preference
for sacrificing a lesser benefit (the use of their money elsewhere)
for a greater (giving money to the charity to help the poor).
It is the donors whose production decisions guide the actions
of the charity.

In this case,
presumably, the donors themselves will be guided, in their turn,
by how effective the organization is in ministering to the poor.
But the ways of judging this effectiveness lack the precision
of monetary purchase, or profit and loss. They depend on subjective
interpretation by the donors, an interpretation that is necessarily
subject to a great deal of error. Donors, in the same way, are
the consumers regardless of the purpose of the nonprofit organization,
whether it is chess playing, medical research, or ideological
agitation. In all these cases, precise profit-and-loss tests of
effectiveness are lacking; in all these cases, too, donors voluntarily
pursue their activity, preferring it to other uses of their resources.
[8]

Nonprofit
organizations also purchase and hire factors of production.
To a large extent, these organizations compete with business
firms for factors; to that extent, they must pay the factors
at least the discounted marginal product they can earn elsewhere.
To some extent, however, the factors may be specific to these
organizations; to that extent their marginal product incorporates
their service to the donor-consumers, that is, the extent to
which they pursue the same goal as the sources of income. Thus,
in both the profit-making and the nonprofit sectors, in their
different forms, production decisions are guided by service
to the consumers. The main difference is that in the case of
business firms, the consumers are separate from the producers,
and (we hope) recoup producers’ investments by buying the products
of the firm; while in nonprofit organizations, the consumers
are the donor-investors.

We have
been describing two polar cases: the business firm, and the
nonprofit organization. Probably most real-world institutions
on the market fall into one of these categories. In some cases,
however, an organization can partake of both modes. Let us consider
two cases. First, a charitable organization, instead of, or
in addition to, giving away alms, may sell some products to
the poor at a low, subsidized price. In this case, while the
donors provide the overall thrust and guidance, part of the
feedback gained by the firm is willingness to buy goods by the
recipients. In some sense, the recipients of alms provide a
guide to their interest in the organization. There are now two
sets of consumers: the donors, and the charity recipients, each
of whom demonstrates its preference for this organization in
contrast to other uses for its money. [9] But the overall purpose of the organization is not to make
a profit, but rather to serve the values and goals of the donors,
and so the donors must be considered the regnant consumers in
this situation.

Another case
is a profit-making business firm where the owner or owners decide
to accept a lesser monetary profit on behalf of some other goals
of the owners: for example, because a certain line of product
is considered immoral by the owners or because the owner wishes
to hire incompetent relatives in order to keep peace in the family.
Here once again, these are two sets of consumers — the buyers
of the product, and the producers or owners themselves. Because
of his own values as a "consumer," the owner decides
to forego monetary profit because of his own moral principles
or because he holds keeping peace in the family high on his value
scale. In either case, the owner is foregoing some monetary profit
in order to achieve psychic profit. Which motive will dominate
depends on the facts of each particular case. Since the market
is generally characterized by a division of labor between producers
and consumers, however, the general tendency will be for monetary
profit, or service to non-owning consumers, to dominate the decisions
of business firms. [10]

It is a
basic fact that all voluntary actions are undertaken because
actors expect to benefit from them. When two persons make a
voluntary exchange of goods or services, they do so because
each expects to benefit from the exchange. When A trades commodity
X for B’s commodity Y, A is demonstrating a preference — an
expected net benefit — for Y over X, while B is demonstrating
the opposite, a preference for X over Y. The free market is
a vast latticework of two-person (or two-group) exchanges, an
array of mutually beneficial exchanges up and down and across
the structure of production.
[11]

Robbery
and the Market

Having dealt
with this idyll of harmonious and mutually beneficial exchanges,
let us now introduce a discordant note. A thief now appears, making
his living by robbing and coercively preying on others: The robber
obtains his income by presenting the victim with a choice: your
money or your life (or, at least, your health) — and the victim
then yields his assets. Or, to be more precise, the robber presents
the victim with a choice between paying immediately or waiting
until the robber injures him. [12] In this situation both parties do not benefit;
instead, the robber benefits precisely at the expense of the victim.
Instead of the consumer’s paying, guiding, and being benefited
by the producer’s activity, the robber is benefiting from the
victim’s payment. The robber benefits to the extent that the victim
pays and loses. Instead of helping expand the amount and degree
of production in society, the robber is parasitically draining
off that production. Whereas an expanded market encourages increases
in production and supply, theft discourages production and contracts
the market.

It should
be clear that the robber is not producing any goods and services
at all. In contrast to consumers who purchase goods and services,
or who contribute voluntarily to a nonprofit organization, no
one is voluntarily purchasing from or contributing to our criminals
at all. If they were, the criminals would not be criminal. In
fact, what distinguishes a criminal group is that its income,
in contrast to that of all other organizations, is extracted
by the use of violence, against the wishes or consent of the
victims. The criminals, then, are "producing" nothing,
except their own income at the expense of others.

It has been
maintained that the payments by the victims are "really"
voluntary because the victim decides to transfer his funds under
penalty of violence by the robber. This kind of sophistry, however,
destroys the original, as well as the common-sense, meaning of
the term "coercion" and renders all actions whatever
"voluntary." But if there is no such thing as coercion
and all conceivable actions are voluntary, then the distinctive
meaning of both terms is destroyed. In this paper, we are defining
"voluntary" and "coercion" in a common-sense
way: that is, "voluntary" are all actions not taken
under the threat of coercion; and "coercion" is the
use of violence or threat of violence to compel actions of others.
Robbery at gunpoint, then, is "coercion"; the universal
need to work and produce is not. In a trivial sense, the victim
agrees to be victimized rather than lose his life; but surely,
to call such a choice or decision "voluntary" is a corruption
of ordinary language. In contrast to truly voluntary decisions,
where each person is better off than he was before the prospect
of exchange came into view, the robbery victim is simply struggling
to cut his losses, for, in any case, he is worse off because of
the entry of the robber onto the scene than he was before.

Just as the
claim that the victim’s payment to the thief is "voluntary"
is patently sophistical, so is it absurd to claim that the robber
is "producing" some service to the victim or anyone
else. The fact that the victim paid him revenue proves no demonstrated
preference or value; it proves only that the victim prefers the
imposition to being shot.

The robber
may well spin elaborate arguments for his productivity and for
his alleged benefit to the victim. He may claim that by extracting
money he is providing the victim a defense from other robbers.
In attempting to achieve and maintain his monopoly of loot,
he may very well act against other robbers trying to muscle
in on his territory. But this "service" scarcely demonstrates
his productivity to the victims. Only if the victims pay the
robber voluntarily can any case be made for a nexus of payment
and benefit. Since payments are now coercive instead of voluntary,
since the consumer has now become the victim, all arguments
offered by the criminal and his apologists about why the victim
should have been eager to pay the criminal voluntarily are in
vain, for the stark and overriding fact is that these payments
are compulsory.

The robber
takes the funds extracted from the victims and spends them for
his own consumption purposes. The total revenue collected by
theft we may call tribute; the expenditures of the robbers,
apart from the small sums spent on burglars’ tools, weapons,
planning, and so on, are consumption expenses by the robbers.
In this way, just as income and assets are diverted from the
productive sector to the robbers, so the robbers are able to
use that money (in their purchasing) to extract productive resources
from the market.

We conclude,
then, that the activities of thieves are most emphatically not
neutral to the market. In fact, the robbers divert income and
resources from the market by the use of coercive violence, and
thereby skew and distort production, income, and resources from
what they would have been in the absence of coercion. If, on the
contrary, we adhere to the view that theft is voluntary and criminals
productive, then criminal activities, too, would be neutral to
the market, in which case the entire problem of neutrality would
disappear by semantic legerdemain, and everything by definition
would be neutral to the market because the rubric of the market
would encompass all conceivable activities of man. In that case,
nothing could be called "intervention" into the market.
By labeling aggressive violence as "coercion" and as
an interference into the market, we avoid this kind of absurd
trap, and we cleave closely to the commonsense view of such concepts
as "coercion," "voluntary," "market,"
and "intervention."

Government
as Robber

We are
now in a position to analyze government and its relationship
to the market. Economists have generally depicted the government
as a voluntary social institution providing important services
to the public. The modern "public choice" theorists
have perhaps gone furthest with this approach. Government is
considered akin to a business firm, supplying its services to
the consumer-voters, while the voters in turn pay voluntarily
for these services. All in all, government is treated by conventional
economists as a part of the market, and therefore, as in the
case of a business firm or a membership organization, either
totally or in part neutral to the market.

It is true
that if taxation were voluntary and the government akin to a business
firm, the government would be neutral to the market. We contend
here, however, that the model of government is akin, not to the
business firm, but to the criminal organization, and indeed that
the State is the organization of robbery systematized and writ
large. The State is the only legal institution in society that
acquires its revenue by the use of coercion, by using enough violence
and threat of violence on its victims to ensure their paying the
desired tribute. The State benefits itself at the expense of its
robbed victims. The State is, therefore, a centralized, regularized
organization of theft. Its payments extracted by coercion are
called "taxation" instead of tribute, but their nature
is the same. The German sociologist Franz Oppenheimer saw this
clearly when he wrote that

there are
two fundamentally opposed means whereby man, requiring sustenance,
is impelled to obtain the necessary means for satisfying his desires.
These are work and robbery, one’s own labor and the forcible appropriation
of the labor of others.. .. I propose .. . to call one’s own labor
and the equivalent exchange of one’s own labor for the labor of
others, the "economic means" forthe satisfaction of
needs, while the unrequited appropriation of the labor of others
will be called the "political means."
[13]

Oppenheimer
then proceeded to identify the State as the "organization
of the political means." [14] Or, as the libertarian writer Albert Jay Nock, vividly put
it: "The State claims and exercises the monopoly of crime….
It forbids private murder, but itself organizes murder on a
colossal scale. It punishes private theft, but itself lays unscrupulous
hands on anything it wants, whether the property of citizen
or alien." [15] Or, as Ludwig von Mises points out, this regularization establishes
a systematic coercive hegemonic bond between the rulers of the
State and the subject that contrasts vividly with the contractual
bond of mutual benefit.

There are
two different kinds of social cooperation: cooperation by virtue
of contract and coordination, and cooperation by virtue of command
and subordination or hegemony. Where and as far as cooperation
is based on contract, the logical relation between the cooperating
parties is symmetrical. They are all parties to interpersonal
exchange contracts. John has the same relation to Tom as Tom
has to John. Where and as far as cooperation is based on command
and subordination, there is the man who commands and there are
those who obey his order. The logical relation between these
two classes of men is asymmetrical. There is a director and
there are people under his care. The director alone chooses
and directs; the others — the wards — are mere pawns in his
actions. [16]

In this coercive,
hegemonic condition, the individual must either accept the orders
of the ruler or rebel. To the extent that the person submits,
this choice then subjects him to the continuing hegemony of the
rulers of the State. Contrasting the contractual and the hegemonic,
Mises states:

In the
frame of a contractual society the individual members exchange
definite quantities of goods and services of a definite quality.
In choosing subjection in a hegemonic body a man neither gives
nor receives anything that is definite. He integrates himself
into a system in which he has to render indefinite services
and will receive what the director is willing to assign to
him. He is at the mercy of the director. The director alone
is free to choose. Whether the director is an individual or
an organized group of individuals, a directorate, and whether
the director is a selfish maniacal tyrant or a benevolent
paternal despot is of no relevance for the structure of the
whole system. [17]

Mises goes
on to contrast the system of contractual coordination that is
responsible for much of the achievements of Western civilization
with the hegemonic system embodied in the State, "an apparatus
of compulsion and coercion… by necessity a hegemonic organization." [18]

The idea
that taxation is voluntary seems to be endemic among economists
and social scientists, though hardly so among the general public. [19] But if an individual refuses to pay his assigned
tax, coercion will be wielded against him, and if he resists the
confiscation of his property he will be shot or jailed. Failure
to pay taxes subjects one to civil and criminal penalties. There
should be little need to pursue the matter beyond this, were not
economists determined to deny this patently obvious fact. As Joseph
Schumpeter trenchantly declared: "The theory which construes
taxes on the analogy of club dues or of the purchases of, say,
a doctor only proves how far removed this part of the social sciences
is from scientific habits of mind."
[20]

But if
taxation is coercive and a system of organized theft, then any
"services" that the government may supply to its subjects
are beside the point, for they do not establish the government
as voluntary or as part of the market any more than a criminal
band’s providing the "service" of defending its victims
from competing bands establishes that its services are voluntarily
paid for. These services are not voluntarily paid for by the
taxpayers, and we therefore cannot say that the taxes measure
or reflect any sort of benefit. In the case of voluntary purchase
on the market, as we have seen, the consumer demonstrates by
his purchase that he values the good or service he buys more
than the price he pays; but in paying taxes he demonstrates
no such thing — only the desire not to be the recipient of further
violence by the State. We have no idea how much the taxpayers
would value these services, if indeed they valued them at all.
For example, suppose that the government levies a tax of X dollars
on A, B, C, and so on, for police protection — for protection,
that is, against irregular, competing looters and not against
itself. The fact that A is forced to pay $1,000 is no
indication that $1,000 in any sense gauges the value to A of
police protection. It is possible that he values it very little,
and would value it less if he could turn to competing defense
agencies. Moreover, A may be a pacifist; so he may consider
the State’s police protection a net harm rather than a benefit.
But one thing we do know: If these payments to government were
voluntary, we can be sure that they would be substantially less
than present total tax revenue. Why? Because if people were
willing to pay voluntarily, then there would be no need for
the apparatus of coercion so intimately wrapped up in taxation.

A second
important point is that, in contrast to the market, where consumers
pay for received benefits (or, in nonprofit organizations, where
members pay for psychic benefits), the State, like the robber,
creates a total disjunction between benefit and payment. The taxpayer
pays; the benefits are received, first and foremost, by the government
itself, and secondarily, by those who receive the largess of government
expenditures.

But if, under
coercive taxation, tax payments far exceed benefits to the victim,
and if benefits accrue to the government itself and to the recipients
of its expenditures at the expense of taxpayers, then it should
be quite clear that it is impossible for taxes ever to be neutral
to the market. Taxation, whatever its size or incidence, must
distort market processes, must alter the allocation and distribution
of assets, incomes, and resources.

The
Alleged Voluntariness of Taxation

Despite
the fact that government and taxation are patently coercive,
economists have devoted considerable energy, in numerous ways,
to maintaining the contrary. If government and taxation were
truly voluntary, then taxation would be akin to a market payment,
and government could be deemed a part of, and therefore neutral
to, the market.

By lumping
government along with private expenditures as a gauge of the
output of the economy, the conventional national income statisticians
are implicitly assuming that government is neutral to the market
because government provides those "services" that
"society" desires it to supply. Government "output"
is equated to the salaries paid to the bureaucracy. By employing
the seemingly precise method of segregating some government
expenses as mere "transfer payments" — the taxing
of Peter to pay Paul — rather than productive purchases of goods
and services, the national income statisticians are in reality
making an unsupportable ideological judgment. For in what sense
does the hiring of bureaucrats, or the purchasing of paper clips,
add to the production of the economy and therefore become somehow
voluntary, while transfer payments are frankly taxing one group
to subsidize another? As we shall see further below, all taxation
necessarily involves taking from one group to subsidize another;
therefore all government expenditures, taken together, constitute
one giant transfer payment.

Even if
one does not go that far, it is a rare person who would not
concede that at least 50 percent of government expenditures
are sheer waste, which would mean that they should not form
part of the estimated national product at all. Despite his recognition
of this fact, as well as the shakiness of ranking government
expenses along with market expenditures, Sir John Hicks finally
sees no alternative. He puts it this way:

I can
see no alternative but to assume that the public services
are worth to society in general at least what they cost….
One may feel considerable qualms about such an assumption
— it is obvious that the government spends far too much on
this, far too little on that: but if we accept the actual
choices of the individual consumer as reflecting his preferences…
then I do not see that we have any choice but to accept the
actual choices of the government, even if they are expressed
through a Nero or a Robespierre, as representing the actual
wants of society. [21]

Elsewhere,
Hicks explains that in constructing national product figures,
"the social accountant … must work upon some convention
which is independent of his individual judgment."
[22]
It is remarkable that Hicks can find security from the
shoals of individual judgment in assuming that Nero or Robespierre
embody "the actual wants of society." Can he really
believe that this fictive "society" and its head of
State adequately represent the preferences of individual citizens?

Collective
Goods

More intellectually
respectable is the contention that insofar as government supplies
society with "collective goods" or "public goods,"
it is supplying a necessary service and is in a sense voluntary
and neutral to the market. Collective goods are goods that allegedly
cannot be supplied on the private market because they are indivisible
and therefore cannot be allocated by having individual consumers
pay for their own portions of the product. No consumer can be
excluded from receiving the good. Like the sun, collective goods
shine on all alike, and none can be made to pay for the service.
Professor Buchanan, sympathetic to the idea of an "ideally
neutral fiscal system," defines it as one that "uniquely
aims at providing the social group with some ‘optimal’ or ‘efficient’
quantity of collective goods and services." Then, if "the
fiscal system is conceived as the means through which collective
goods and services are provided to members of the society without
any subsidiary or supplementary social purposes," we have,
says Buchanan, an "analogy with the market economy."
The fiscal system is then "ideally neutral" to the market
economy. [23]

In the
first place, even if there were such things as collective goods,
government supply would establish neither its voluntarism nor
its neutrality. Even if there were no other way to supply these
services, taxation to provide them is still compulsory.
And since it is coercive, there is no standard, as there is
on the market, to decide how much of these services to supply
by taxation. And the more the government provides, the less
people are allowed to spend on their own private consumption.

Furthermore,
if there exists but one anarchist in any society, the very existence
of the State coercively supplying a collective good constitutes
a great psychic harm to that anarchist. The anarchist, therefore,
receives not a collective service but an individual harm from
the operations of the State. It follows therefore that the good
or service cannot be truly collective; its "service"
is separable, and distinctly negative, to the anarchists. Hence,
the good can neither be truly collective (indivisible, and positive)
nor can it be voluntary. [24]

No matter
how "divisible" the service, furthermore, a collective
good is not quite like the sun: The more resources the government
expends, the greater will be its output. These resources will
have to be extracted from other potential products. Take, for
example, "defense" or police protection, which is
often considered to be provided as a homogeneous lump to everyone.
But every good or service in the world, "collective"
ones included, is provided, not in lump sum, but in marginal
units. Yet strangely, economists, trained to think of marginal
units everywhere else, suddenly start referring to defense as
a "lump" when discussing government. In reality, however,
there is a vast range of "defense" services that the
government (or any other defense agency) could supply to its
customers. To take two polar extremes, the government could
supply one unarmed policeman for an entire country, or it could
sink most of the national product into providing an armed bodyguard,
replete with tank and flame throwers, for every citizen. The
question that must be answered by any defense agency is not
whether or not to supply defense, but how much defense to supply
to whom? In the same way, the question confronting a steel company
is not whether or not to produce steel, but how much steel of
various grades and types to supply.

But this
failure to provide rational criteria for amounts and types of
collective services is an inherent flaw in any provision by
government. The market’s price system and profit-and-loss test
tell private firms how much of what kind of steel to produce;
rational criteria for satisfying consumers most efficiently
are inherent in the free market. But government can have no
such criteria. Since the consumers of defense do not pay for
the service, since taxes do not measure the service, and since
the government does not have to worry about losses that can
be recouped by further taxation, there are no criteria of how
much defense to provide to whom. Decisions are purely arbitrary,
as well as coercive. If, on the other hand, defense were provided
by private firms on the market, then these firms would, as in
the rest of the market, supply efficiently the amounts and types
of protection desired by particular customers. Those customers,
for example, who desired and were willing to pay for round-the-clock
bodyguards would do so; those who felt no need for protection
— or pacifists aghast at the very idea — would pay nothing;
and there might be a large spectrum of services in between.

More specifically:
Only a minority of specific individuals find themselves in actual
need of police or judicial protection during any given period.
If A and B are attacked, the police can spring to the aid of
these specific persons. It will be objected that even if only
a few persons are actually attacked at any one time, no one
can determine who will be attacked in the future, and so everyone
will want to be sure of protection in advance, thus salvaging
the notion of a "collective want." But, again, there
will be a spectrum of opinion among individuals. Some persons
may feel pretty sure that they will not be attacked, and will
therefore be willing to opt out of protection, to take their
chance rather than pay a protection tax. Others will be confident
of their own ability to repulse an attack, or would only patronize
another, competing private defense agency. Others may fear an
attack so little that the cost of paying protection will not
be worth the benefit. On the free market, individuals would
be free to choose any or none of these protection-insurance
packages.

Even if
it be conceded that not all people demand protection, it might
still be argued that defense is a "collective good"
because no one can be excluded from receiving its benefits.
But surely if the inhabitants of a particular block refuse to
pay for the police protection, the police may simply exclude
that block from its patrols or other services. In the case of
judicial protection, the conventional case for a collective
good is even weaker. For surely a court, financed by voluntary
payment (either by insurance premium or by fee-for-service),
can refuse to hear the case of a nonpaying plaintiff. Even in
the case of national defense, which seems to be a particularly
strong example of a collective good, the pacifist or anarchist
receives a harm rather than a good, and exclusion can be practiced
in such ways as not rushing troops or planes to defend nonpaying
areas, or at the very least not to defend them as rapidly and
as diligently as areas that do pay.

Thus defense
cannot be a collective good so long as only one pacifist or
one anarchist exists in the society, for these persons will
receive a harm rather than a benefit when they receive the "service"
of coercive defense. And defense is not a collective good because
its recipients can be excluded and separated.

Professor
Kenneth Goldin is one of the very few economists to recognize
that defense service is separable and not indivisible. He also
points out that increased police service requires increased expense:

As communities
grow, and more residents must be supplied with crime defense,
most communities hire more policemen; clearly an increased
cost. If more policemen are not hired, then new residents
can be served only by decreasing service to others: more streets
can be patrolled only if there are fewer patrols at night;
more properties can be checked only if each one is checked
less thoroughly, and only the more urgent calls can be responded
to. Each of these service changes imposes costs on residents.
Either they will suffer from more crime, or they will incur
the costs of purchasing other types of crime defense. Many
types of crime defense are selectively available such as locks,
fences, guard dogs, guards, and also alarm companies which
respond if the burglar alarm is tripped. And don’t overlook
private police patrols, which check selected houses on selected
streets, as thoroughly and as often as each customer requests,
for a fee. [25]

Court services
are clearly separable, and private arbitrators are indeed generally
more efficient than government courts. Goldin adds:

To service
more persons generally requires more judges and courtrooms.
If more facilities are not acquired, additional users will
impose costs on others, in the form of longer days for trial
and/or less judicial time spent on each case. It is costless
to serve additional persons only if they have no disputes.

To some
extent, he goes on, even government courts charge fees to users
and therefore charge for benefits received, although the fees
usually do not vary with the difficulty of the case. And "private
arbitrators are also available, selectively, to those parties
willing to pay a fee. So, although adjudication is a fundamental
service in any society, it does not follow that adjudication
is a public good."
[26]

And even
in the case of national defense, Goldin points out,

there
is certainly some variation in protection, especially among
cities (regarding protection by missiles), and among Americans
who either travel or have property abroad. While the troops
may be sent out to protect some Americans or their property
from some foreign seizures (such as the Mayaguez), in other
cases no action is taken (tuna boats). One of the firmly embedded
myths of modern public finance is that it doesn’t matter if
population increases: The costs of defending the U.S. from external
attack will not change. But consider two points. First, the
new population must live somewhere. If they cause an increase
in the U.S. land area, then either more defenses must be provided,
or there will be a decrease in the level of protection to earlier
residents and either way the marginal cost of protecting additional
persons is positive…. Second, even if the new population resides
within the existing boundaries, they will generally increase
the amount of physical and human wealth which might be coveted
by an enemy. That is, foreign attack is (at least partially)
an economically motivated action, and is more likely to occur
if there is more capital worth coveting.
[27]

Not only
does total cost of national defense vary with population, but
the service of protection against foreign attack can be variable.
First, there once existed private armies, and such armies, serving
private individuals or groups, still exist today. Goldin mentions
the armies of religious groups in contemporary Lebanon, as well
as a Central American army owned by Robert Vesco. These armies,
as Goldin states, "yield benefits primarily to their owner." [28]

Second, even
a collective State army can vary its services to individual citizens:

A military
force also protects people from theft of property and kidnapping
by foreigners. Exclusion from this service is relatively easy:
The military force simply makes no attempt to stop theft or
kidnapping of named persons. These persons would either hire
their own guards, or suffer the damages of theft or kidnapping
by foreigners…. Americans with substantial property abroad
or at sea might well prefer to provide their own anti-theft
defenses, rather than pay for a communal army which cannot
be counted on to protect their property…. Contrary to public
goods theory, even in this key case of defense from external
attack, exclusion is not impossible and the marginal cost
of serving additional persons generally is not zero.
[29]

Moreover,
as Buchanan concedes, a collective defense may be a service
to one citizen and be considered a distinctly negative "service"
by another:

The common
availability of collective goods or services does not, of
course, imply that similar evaluations are placed on these
by different persons. The Vietnam War effort demonstrated
this point. The services of the plane that bombed North Vietnam
in October, 1968, were equally available to all U.S. citizens.
But the value placed on these services may have ranged from
significantly positive levels … to significantly negative
levels for those who felt that continued bombing was both
immoral and a barrier to peace negotiations.
[30]

To Professor
Buchanan, the "classic" example of a collective good
is the lighthouse. The beams of the lighthouse are indivisible:
"If one boat gets all the light beams, all boats may do
likewise." [31] Or, as Samuelson has put it, "A businessman could not
build it for a profit, since he cannot claim a price from each
user." [32] The theory is that it would
be virtually impossible for a lighthouse keeper to row out to
each boat to demand payment for use of the light. And that hence
lighthouses have always been supplied by government.

But, first,
the problem has now been eliminated by modern technology. It is
now technologically highly feasible for a lighthouse’s rays to
be available only to that boat that has the proper electronic
equipment, and to pay a fee for the use of that equipment. But,
apart from this, it turns out, as Ronald Coase has discovered,
that from the seventeenth until the early nineteenth centuries,
the British lighthouse system was developed and operated by private
enterprise. The lighthouse owners hardly bothered about collecting
a fee from each boat on the spot. Instead, the owners employed
agents at ports who found out what routes each ship entering the
port had sailed and therefore what lighthouses the ship had passed
and charged them accordingly. [33] Furthermore, additional users of lighthouses will impose higher
costs for providing them. More ships will increase the likelihood
of congestion in the protected waters and will require more navigational
aids. [34]

In his
trenchant critique of the offhanded way in which economists,
from Mill to Samuelson and Arrow, have wrongly used the lighthouse
as an example of a collective good, Coase concludes:

These
references by economists to lighthouses are not the result
of their having made a study of lighthouses or having read
a detailed study by some other economist. Despite the extensive
use of the lighthouse example in the literature, no economist,
to my knowledge, has ever made a comprehensive study of lighthouse
finance and administration. The lighthouse is simply plucked
out of the air to serve as an illustration….

This
seems to me to be the wrong approach…. [G]eneralizations
are not likely to be helpful unless they are derived from
studies of how such activities are actually carried out within
different institutional frameworks….

The account
in this paper of the British lighthouse system … shows that,
contrary to the belief of many economists, a lighthouse service
can be provided by private enterprise…. The lighthouses
were built, operated, financed and owned by private individuals,
who could sell the lighthouse or dispose of it by bequest.
The role of the government was limited to the establishment
and enforcement of property rights in the lighthouse. The
charges were collected at ports by agents from the lighthouses.
The problem of enforcement was no different for them than
for other suppliers of goods and services to the shipowner.
[35]

The analogous
navigational aid for air traffic, the services of the air-control
tower, can be and is sold separately to individual consumers.
Control towers will distribute radar information, for example,
to whoever has radar equipment, but the equipment must be purchased
by individual users. And heavier use of airspace or airport
runways requires more navigational aids and therefore more expenses
to service the users.
[36]

Radio and
television have been cited as collective goods since servicing
another viewer allegedly involves no additional cost. But additional
service is far from costless, and viewers are separable and excludable;
therefore radio and TV fail both tests of a collective good. An
increased viewing audience means supplying more, and more varied,
programs. And new users must either be supplied with a stronger
signal or may require cable or stronger antennas because of the
increased congestion. Moreover, consumers are excluded now from
television. To watch television programs they must buy sets and
then must either pay as they go (various forms of pay TV) or else
advertisers must pay, imposing on many viewers the psychic costs
of commercials. And public television imposes on its viewers the
psychic costs of being subjected to lengthy requests for donations. [37]

Moreover,
in a sense the collective goods case for radio and television
proves too much. For movies may also be said to be "costless"
if additional viewers fill empty seats in a theater. Must movies,
too, be nationalized, be supplied only by government, and perhaps
be free to all?

Again,
this argument proves too much. For not only patents and inventions
are produced by creators: There is also art, sculpture, music,
literature, philosophy. Are we to say that all these products
of the human spirit are "collective goods" because
we cannot be fully excluded from enjoying the products of Beethoven,
Shakespeare, or Vermeer? Must all artists therefore be nationalized?

Another commonly
cited example of a collective good is insect control by airplane
spraying. It is alleged to be impossible to exclude land underneath
from being sprayed, and the marginal cost of adding more land
sprayed is zero. But if new residents live in previously uninhabited
areas, then extra cost is incurred in servicing them, and the
same is true if they are engaged in activities that attract insects.
More airplane time and fuel must be used as well as more spray.
Furthermore, the airplane could often, if it wished, exclude specific
parcels of land from its spray. And more important, many of those
receiving this "service" have not wanted it and have
objected to the spraying as vigorously as the pacifist has protested
the use of violence in defense. Indeed, a shift in public attitudes
toward chemical sprays has greatly reduced their use in recent
years. But if some people consider a service such as a spray as
"bad," how can it be an indivisible, positive collective
good?

Moreover,
as Goldin points out, individual consumers have another option:
to buy their own spray guns and spray their own property. In that
case, each individual could choose and pay for the type and amount
of spray that he precisely desires.
[39]

For many
reasons, then, there are no collective goods, and even if there
were, as we have already seen, their supply would be coercive
if furnished by government and taxation. But there is yet another
vital point: For even if a good or service could only be supplied
"collectively," why must that collection be compulsory?
Why couldn’t individuals pool their resources voluntarily, as
in club dues, and make voluntary contributions for the supply
of the service? [40] Or, as Gustave de Molinari argued, couldn’t
a government even contract for the supply of collective services
with private, competitive, and therefore more efficient firms? [41]

Or, as
Spencer Heath urged, on the model of real estate developments,
shopping centers, and hotels, couldn’t such "collective"
or "public" goods as police, fire, roads, sanitation,
and so on, be supplied by a large private firm with tenants
paying for these services in their rents? [42]

Finally,
if we look at human history, we find that every good, without
exception, that economists glibly term a "collective good"
has actually been successfully supplied by the free market.
Not only do private guards and patrols exist, and private lighthouses
in the past, but there have been societies, such as medieval
Ireland, that supplied a complex network of defense service
and insurance — including police, crime insurance, and competitive
courts — without a State or taxation. Competing market courts
serviced for centuries the vitally important fairs of Champagne
in the Middle Ages. Common-law courts were marked by competitive,
nongovernmentally appointed judges. Private guards and private
arbitrators exist successfully even in our society where the
State monopolizes most forms of defense.
[43]

It seems
clear, then, that voluntary rather than governmental supply
of the collective good would be possible in every case; the
only objection might be, not that the good — defense, firefighting,
or whatever — could not be supplied, but that "too little"
would be supplied. But that brings us to the second line of
argument by the proponents of government.

External
Benefits

If forced
to retreat from the "strong" concept of collective goods,
the advocates of government supply or subsidization of such goods,
fall back on a "weak," and therefore more plausible
argument. Even though every collective good might be furnishable
by private means, "not enough" will be supplied because
of the difficulty or impossibility of capturing enough payment
from "free riders" who benefit from these services without
paying for their benefits. Government supply, or taxation of free
riders to subsidize supplies, then becomes required in order to
"internalize the external benefits" acquired, but not
paid for, by the free riders. [44]

But this
argument generates far more difficulties than it solves. It proves
too much in many directions. In the first place, how much of the
deficient good should be supplied? What criterion can the State
have for deciding the optimal amount and for gauging by how much
the market provision of the service falls short? Even if free
riders benefit from collective service X, in short, taxing them
to pay for producing more will deprive them of unspecified amounts
of private goods Y, Z, and so on. We know from their actions
that these private consumers wish to continue to purchase private
goods Y, Z, and so on, in various amounts. But where is their
analogous demonstrated preference for the various collective goods?
We know that a tax will deprive the free riders of various amounts
of their cherished private goods, but we have no idea
how much benefit they will acquire from the increased provision
of the collective good; and so we have no warrant whatever for
believing that the benefits will be greater than the imposed costs.
The presumption should be quite the reverse. And what of those
individuals who dislike the collective goods, pacifists who are
morally outraged at defensive violence, environmentalists who
worry over a dam destroying snail darters, and so on? In short,
what of those persons who find other people’s good their "bad?"
Far from being free riders receiving external benefits, they are
yoked to absorbing psychic harm from the supply of these goods.
Taxing them to subsidize more defense, for example, will impose
a further twofold injury on these hapless persons: once by taxing
them, and second by supplying more of a hated service.

Since the
tax-and-subsidy, or government-operation, route abandons the
process of the market, there is no way of knowing who the "negative
free riders" are, and how much they will be suffering from
an increased tax. We do have a pretty good idea, however, that
one or more of these people exists: that there is at least one
pacifist, anti-dam environmentalist, anarchist opposed to all
government actions, and so on, in every society. But in that
case, the free-rider as well as the "stronger" collective-good
argument for the neutrality of government falls to the ground.

The young
Herbert Spencer, in his great treatise Social
Statics
, declared that an individual should be able to
opt out of taxation, to "ignore the State," and to renounce
its services. [45] Criticizing his own work a half-century later, Spencer, in
his Autobiography,
employs the free-rider argument. "Mr. Spencer," he charges,

actually
contends that the citizen may properly refuse to pay taxes,
if at the same time he surrenders the advantages which State
aid and State protection yield him! But how can he surrender
them? In whatever way he maintains himself, he must make use
of sundry appliances which are indirectly due to governmental
organization; and he cannot avoid benefiting by the social
order which government maintains. Even if he lives on a moor
and makes shoes, he cannot sell his goods or buy the things
he wants without using the road to the neighboring town, and
profiting by the paving and perhaps the lighting when he gets
there. And, though he may say he does not want police guardianship,
yet, in keeping down footpads and burglars, the police necessarily
protect him, whether he asks them or not. Surely it is manifest
… that the citizen is so entangled in the organization of
his own society that he can neither escape the evils nor relinquish
the benefits which come to him from it.
[46]

The later
Spencer was properly refuted, on his own earlier grounds, by
"S.R." "S.R." points out first that on the
later Spencer’s own grounds, a man at least has the right to
refuse to pay for advantages that he can relinquish. "S.R."
then quotes from the earlier Spencer’s application of his "law
of equal freedom":

If every
man has freedom to do all that he wills, provided he infringes
not the equal freedom of any other man, then he is free to
stop connection with the State — to relinquish its protection
and to refuse paying toward its support. It is self-evident
that in so behaving he in no way trenches upon the liberty
of others; for his position is a passive one, and while passive
he cannot become an aggressor.. .. He cannot be coerced into
a political combination without a breach of the law of equal
freedom; he can withdraw from it without committing any such
breach; and he therefore has the right to withdraw.

"S.R."
then proceeds: "Is a man who refuses to pay for incidental
advantages he has not solicited an aggressor? Is it a breach
of the law of equal freedom to withdraw from a combination that,
in working for itself and pursuing its own benefit, indirectly
benefits one who is perfectly willing to forego the blessings
of the uninvited beneficence?" "S.R." then points
out that Spencer is implicitly modifying his equal freedom formula
to say that anyone can do whatever he wishes, provided not only
that he does not infringe on anyone else’s freedom, but also
provided "that no one confers upon him benefits which he
cannot wholly surrender while remaining a producer and trader."

"S.R."
then tellingly supplies the logical reductio of the free-rider
argument:

Has an
individual the right to withhold proper contributions from
neighbors who, individually or collectively, benefit him by
caring for their own interests? If my neighbors hire private
watchmen, they benefit me indirectly and incidentally. If
my neighbors build fine houses or cultivate gardens, they
indirectly minister to my pleasure. Are they entitled to tax
me for these benefits because I cannot "surrender"
them? [47]

Thus the
free-rider argument proves far too much. After all, civilization
itself is a process of all of us "free-riding" on
the achievements of others. We all free-ride, every day, on
the achievements of Edison, Beethoven, or Vermeer. When capital
investment increases, and technology improves, the real wages
of workers and the standard of living of consumers increase,
even though they have contributed nothing to these advances.
By simply continuing to work and consume, laborers and consumers
receive the benefits of the inventions and investments of others
without paying for them. So what must we infer from this? Are
we all to wear sackcloth and ashes? If our neighbors are wiser,
prettier, or happier, we all benefit in countless ways. So what
must we do about it? Must we all be taxed to subsidize their
beauty and wisdom?

And if
people feel that not enough beauty, wisdom, inventions, police
protection, and so on, will be provided by consumer payment
and because of free riders, they are perfectly at liberty to
subsidize provision of such goods on their own, individually
or through societies or foundations. By doing so, the donor
will demonstrate that, to him, the expected psychic benefit
from his subsidy is worth more than the money he pays.

It will
be objected that potential donors will not donate if they are
rankled by the spectacle of free riders who stubbornly refuse
to donate for the benefits they receive. And, further, that
consumers on the market will not be willing to purchase these
goods if they know that free riders abound. If we wished to
moralize here, we might respond that these persons might be
well advised to attend to their own affairs without wallowing
in envy at benefits received by others. But, in any case, if
the rankling at the existence of free riders is strong enough,
these persons are always free to boycott the miscreants, either
by not trading with them or by general ostracism. [48]

The consumers
or donors can also, if they wish, get around the free-rider problem
by making contracts, either singly or in organized fashion, that
will pay for the "collective good," but only on condition
that everyone else, including the potential free riders, pay as
well. This form of contract would enable those willing to pay,
in effect, to put the choice to the free riders: Either you join
in paying or the service will not be provided. [49]

Transaction
Costs

It has been
objected that the "transaction costs" of identifying
the free riders or channeling donations, or organizing boycotts
or of making conditional contracts, are "too high,"
and that therefore those who want these services are justified
in turning to the government to force the free riders to pay.

There are
several grave fallacies in the transaction costs argument for
taxation. In the first place, it ignores the transaction costs
of the government process itself. The implication is that government
is a costless Mr. Fixit, levitating angelically above the fray
and busily correcting "market failures." If private
persons have difficulty in identifying free riders, will government
be able to limit its taxation to free riders only? What of the
external costs of the inevitable taxation beyond the free rider?
And, as we have seen, since market and demonstrated preference
through individual action is not available to government, there
is no way that government can either identify the free riders
or the "negative free riders," or to discover how
much benefit each person would derive from the subsidized supply
and therefore how much each person should be taxed. There are
also the inevitable grave inefficiencies in the political supply
of goods and services and in the political process itself that
need not be expounded here. At any rate, there is no reason
to assume that the transaction costs of turning to government
will be lower than those of private operation, and every reason
to assume the opposite.

Second,
another definitive rebuttal of the transaction-cost argument
for government is the impossibility of comparing transaction
costs, not simply of private and government action, but at any
time and in any situation. For costs, like utilities, are subjective,
and therefore nonmeasurable and noncomparable between persons.
There is no such thing as social transaction costs or any social
costs whatever.
[50]
Any government action will impose enormous psychic
cost on the anarchist; any private action will do likewise for
the dedicated totalitarian. How are we to compare them? If an
entity does not and cannot exist, then it is senseless to take
as one’s goal that it be minimized.

And third,
even if transaction costs were measurable and comparable, we
must ask: What is so terrible about transaction costs? On what
basis are they considered the ultimate evil, so that their minimization
must override all other considerations of choice, freedom, or
justice? [51] After all, if minimizing these dread costs were truly the
be-all and end-all, we could all pledge to obey one dictator,
one Brezhnev or Idi Amin, in all things, and then everyone would
have the assurance of knowing everyone else’s relevant value-scales.
Other problems would abound, but at least transaction costs
would be forced down to a minimum.

Coercion
as "Really" Voluntary

A final fallback
argument for the voluntariness of taxation and government asserts
that every member of society wishes to pay for the collective
goods but will do so only if everyone else pays. Therefore the
seeming coercion of taxation is a fallacy, for everyone voluntarily
pays in the serene knowledge that all beneficiaries are paying.
In a kind of Hegelian leap, we are all voluntarily and cheerfully
forcing ourselves to be free. [52]

This argument
adds a heavy dose of mysticism to the other collective goods
and external benefits arguments. For how do we know that everyone
is voluntarily paying knowing that everyone else is doing so?
There is no evidence, there is no social compact whatever to
that effect. Is all that they pay supposed to be voluntary,
or just some? Are they perhaps in mourning that their payments
are not higher? And what of the anarchist and the pacifist and
the tax rebel? Is their bitter opposition to taxation
only a cloak for their cheerful acceptance? On what basis are
we supposed to accept this curious doctrine?

There is,
in short, no warrant whatever for Baumol’s contention that every
individual prefers to be coerced into paying for a service rather
than have none of it supplied at all. Moreover, this argument
ignores the options as discussed above, of conditional contracts
to finance the service voluntarily, or of voluntary boycotts
of free riders.
[53]

A popular
argument holds that the fact of democracy establishes the voluntary
nature of government. This idea need not detain us here long.
As Herbert Spencer pointed out, democracy at best can only reduce
the number of people being coerced; it does not eliminate coercion:

By no
process can coercion be made equitable…. The rule of the
many by the few we call tyranny: the rule of the few by the
many is tyranny also…. "You shall do as we will, and
not as you will," is in either case the declaration;
and if the hundred make it to the ninety-nine, instead of
the ninety-nine to the hundred, it is only a fraction less
immoral. Or two such parties, whichever fulfills this declaration
necessarily breaks the law of equal freedom: the only difference
being that by the one it is broken in the persons of the ninety-nine,
whilst by the other it is broken in the persons of a hundred.
And the merit of the democratic form of government consists
solely in this, that it trespasses against the smallest number.
[54]

Spencer
concludes that "the very existence of majorities and minorities
is indicative of an immoral state." For the "enactment
of public arrangements by vote," he points out, "implies
that the desires of some cannot be satisfied without sacrificing
the desires of others … implies therefore, organic immorality."
[55]

Spencer goes
on to point out that the doctrine that men may only be taxed by
their own consent implies their right not to pay taxes, to "ignore
the State." He then notes the reply of the statists that
"this consent is not a specific, but a general one, and that
the citizen is understood to have assented to everything his representative
may do, when he voted for him." Spencer’s rebuttal to this
democratic mythos is definitive:

But suppose
he did not vote for him; and on the contrary did all in his
power to get elected some one holding opposite views — what
then? The reply will probably be that, by taking part in such
an election, he tacitly agreed to abide by the decision of
the majority. And how if he did not vote at all? Why then
he cannot justly complain of any tax, seeing that he made
no protest against its imposition. So, curiously enough, it
seems that he gave his consent in whatever way he acted —
whether he said yes, whether he said no, or whether he remained
neuter! A rather awkward doctrine this. Here stands an unfortunate
citizen who is asked if he will pay money for a certain preferred
advantage; and whether he employs the only means of expressing
his refusal or does not employ it, we are told that he practically
agrees; if only the number of others who agree is greater
than the number of those who dissent. And thus we are introduced
to the novel principle that A’s consent to a thing is not
determined by what A says, but by what B may happen to say! [56]

The
Unanimity Principle

Sensing
the problems of coercion by majority rule, social theorists
from Calhoun (the "concurrent majority" theory) to
Wicksell and Buchanan (the Unanimity Principle) have been trying
to arrive at a polity free of this coercion. Although the search
for a way out of coercion may be commendable, the seeming voluntariness
of the Unanimity Principle suffers from two grave flaws. First,
Wicksell and Buchanan apply the Unanimity Principle only to
changes in the status quo, that is, to new acts of taxation
and expenditure. But this simply ratifies existing property
titles, and assumes that these existing property titles are
just and must be maintained. In short, the ratification of changes
from the zero point only by unanimous consent, virtually freezes
that zero point permanently. But should it be? Suppose that,
previous to the installation of the Unanimity Principle, a group
of persons, either by their own violent conquest or through
State action, had stolen and confiscated the property of another
large group and called that property their own. The Unanimity
Principle would then prohibit the victims from taking back their
property, since such action would have to gain the consent of
the robbers. In his classic article on the Unanimity Principle,
Knut Wicksell first acknowledged this problem and then brusquely
dismissed it. Thus Wicksell first concluded:

If there
are within the existing property and income structure certain
titles and privileges of doubtful legality or in open contradiction
with modern concepts of law and equity, then society has both
the right and the duty to revise the existing property structure.
It would obviously be asking too much to expect such revision
ever to be carried out if it were to be made dependent upon
the agreement of the persons primarily involved.
[57]

But having
admitted that, Wicksell then proceeded as if it had not been said,
asserting that "no [such] measure should be carried out unless
it have the prior unanimous or at any rate overwhelming support
of the whole people."
[58]

Second,
the Unanimity Principle turns out to be something less than
unanimous. Pacifists, tax rebels, and anarchists are apparently
inconvenient to the goal of achieving unanimity in taxation,
so the proponents speak of "relative unanimity" (Buchanan
and Tullock), "approximate unanimity" (Wicksell),
or "virtual unanimity" (the later Spencer). But these
are all oxymorons, comparable to the phrase "only a little
pregnant." Unanimity must mean consent by all and nothing
less. [59]
Anything less is necessarily coercive and not voluntary.
[60]

J.B.
Say on Taxation

In contrast
to almost all other economists, J.B. Say was astonishingly clear-sighted
about the true nature of the State and of taxation. In Say there
was no vain, mystical quest for a truly voluntary State or for
a benign quasi-business firm supplying services to the grateful
public. Say saw clearly that government supplies services to
itself and its favorites, that all government spending is therefore
consumption spending by the politicians and the bureaucracy,
and that that spending is extracted by coercion at the expense
of the taxpaying public.

As Say points
out: "The government exacts from a taxpayer the payment of
a given tax in the shape of money. To meet this demand, the taxpayer
exchanges part of the products at his disposal for coin, which
he pays to the tax-gatherers." Eventually, the government
spends the money on its own needs, and so "in the end ..
. this value is consumed; and then the portion of wealth, which
passes from the hands of the taxpayer into those of the tax-gatherer,
is destroyed and annihilated." Were it not for taxes, the
taxpayer would have spent his money on his own consumption. As
it is, "The state … enjoys the satisfaction resulting from
the consumption." [61]

Say goes
on to attack the "prevalent notion, that the values, paid
by the community for the public service, return to it again
…, that what government and its agents receive, is refunded
again by their expenditures." Say is indignant:

This
is a gross fallacy; but one that has been productive of infinite
mischief, inasmuch as it has been the pretext for a great
deal of shameless waste and dilapidation. The value paid to
government by the tax-payer is given without equivalent or
return: it is expended by the government in the purchase of
personal service, of objects of consumption.
[62]

At this point
Say revealingly quotes with approval Robert Hamilton’s likening
of government to a robber in refuting the argument that taxation
is harmless because the money is recirculated into the economy
by the State. Hamilton
compares this impudence to the "forcible entry of a robber
into a merchant’s house, who should take away his money, and tell
him he did him no injury, for the money, or part of it, would
be employed in purchasing the commodities he dealt in, upon which
he would receive a profit." Say then adds "that the
encouragement afforded by the public expenditure is precisely
analogous." [63]

Say bitterly
goes on to denounce the "false and dangerous conclusion"
of writers who claim that public consumption increases general
wealth. "If such principles were to be found only in books,"
Say went on, "and had never crept into practice, one might
suffer them without care or regret to swell the monstrous heap
of printed absurdity." But unfortunately they have been
put into "practice by the agents of public authority, who
can enforce error and absurdity at point of the bayonet or mouth
of the cannon." [64] Once again, Say sees the uniqueness of government
as the naked exercise of force and coercion.

Taxation,
then, is the coercive imposition of a burden on members of the
public for the benefit of consumption by the ruling class, by
those in command of the government. Say writes:

Taxation
is the transfer of a portion of the national products from
the hands of individuals to those of the government, for the
purpose of meeting the public consumption of expenditure….
It is virtually a burthen imposed upon individuals, either
in a separate or corporate character, by the ruling power
… for the purpose of supplying the consumption it may think
proper to make at their expense; in short, an impost, in the
literal sense. [65]

Thus Say
is not impressed with the notion, properly ridiculed by Schumpeter,
that all of society somehow voluntarily pay their taxes for
the general benefit; instead, taxes are a burden coercively
imposed upon society by the "ruling power." Neither
is Say impressed if the taxes are voted by the legislature:
For "what avails it … that taxation is imposed by consent
of the people or their representatives, if there exists in the
state a power, that by its acts can leave the people no alternative
but consent?"

Taxation,
Say clearly pointed out, cripples rather than stimulates production,
for taxation robs people of resources that they would rather
use in a different way:

Taxation
deprives the producer of a product, which he would otherwise
have the option of deriving a personal gratification from,
if consumed … or of turning to profit, if he preferred to
devote it to any useful employment…. [T]herefore, the subtraction
of a product must needs diminish, instead of augmenting, productive
power. [66]

Say continues
with a devastating critique of the argument that taxation is useful
in stimulating people’s exertions and the development of industry.
But first, industry is looted to satisfy the demands of the State,
and hence productive capital is crippled:

Mere
exertion cannot alone produce, there must be capital for it
to work upon and capital is but an accumulation of the very
products, that taxation takes from the subject: … in the
second place, it is evident, that the values, which industry
creates expressly to satisfy the demands of taxation, are
no increase of wealth; for they are seized on and devoured
by taxation.

As for
the argument that taxes stimulate exertions:

To use
the expedient of taxation as a stimulative to increased production,
is to redouble the exertions of the community, for the sole
purpose of multiplying its privations, rather than its enjoyments.
For, if increased taxation be applied to the support of a
complex, overgrown, and ostentatious internal administration,
or of a superfluous and disproportionate military establishment,
that may act as a drain of individual wealth, and of the flower
of the national youth, and an aggressor upon the peace and
happiness of domestic life, will not this be paying as dearly
for a grievous public nuisance, as if it were a benefit of
the first magnitude?
[67]

Say is
also properly critical of Ricardo for maintaining that the suppression
of one branch of private industry by taxation will always be
compensated by a diversion of capital to some other industry.
Say rebuts that:

I answer,
that whenever taxation diverts capital from one mode of employment
to another, it annihilates the profits of all who are thrown
out of employ by the change, and diminishes those of the rest
of the community: for industry may be presumed to have chosen
the most profitable channel. I will go further, and say, that
a forcible diversion of the current of production annihilates
many additional sources of profit to industry. Besides, it
makes a vast difference to the public prosperity, whether
the individual or the state be the customer…. [In the latter
case] wealth and production decline in consequence, and prosperity
vanishes, leaving behind the pressure of unremitting taxation. [68]

Say concludes
with a scornful attack on the very idea that taxation and government
spending add to national wealth:

It is
a glaring absurdity to pretend that taxation contributes to
national wealth, by engrossing part of the national produce,
and enriches the nation by consuming part of its wealth. Indeed,
it would be trifling with my reader’s time, to notice such
a fallacy, did not most governments act upon this principle,
and had not well-intentioned and scientific writers endeavored
to support and establish it. [69]

Say’s basic
recommendation on the tax question was, in consequence, simple,
trenchant, and clear-cut: "The best scheme of finance is,
to spend as little as possible; and the best tax is always the
lightest." [70] In short, that government is best that spends
and taxes least. But then, paraphrasing Thoreau’s and Benjamin
R. Tucker’s logical extension of the similar conclusion of Jefferson:
May we not say that that government is best that spends and
taxes not at all? [71]

The
Neutral Tax

Any quest
for a nonredistributive neutral tax, such as free-market economists
indulge in, must succeed in providing criteria for two basic
questions about taxes: (a) how much taxes should be paid? and
(b) who should pay them? The free market answers questions of
"who" and "how much" very easily for its
goods and services. But free-market economists have been singularly
unsuccessful in providing either of these criteria for taxation.
[72]
Thus the answer of laissez-faire economists
to the former question — that taxation should be limited strictly
to protection or defense — founders, not only on the coercive
nature of the payment, but also on the nonhomogeneity of the
defense service. Defense, as we have seen above, is not a homogeneous
lump but a good available in different quantities and qualities,
in marginal units. Since the free market has been abandoned
in this area, there is no way to arrive at any rational criteria
for the optimal total amount or distribution of government defense,
or of any other good or service.

Taxpayers
and Tax-Consumers

It might
be claimed that neutral taxation could be achieved in one way,
if in no other: if the precise amounts that each individual paid
in taxes were returned to him in government expenditure. Thus
if A paid $1,000 in taxes in a certain year, B paid $500, and
C $300, and so on, then A would receive $1,000, B $500, and so
on. It might be thought that such a taxation system would be at
best absurd; for why construct an elaborate machinery that would
simply take and then give back the same amounts to each person?
Why then have taxation at all? But there is a grave flaw even
in this attempt at a neutral tax: neglect of the bureaucratic
handling charge.

For even
if such a precisely equal tax-and-payment mechanism were constructed,
there would have to be salaries paid to the bureaucracy administering
the system (and to the politicians ruling the administrators).
But these bureaucrats, then, would, in contrast to the rest
of society, be net tax-receivers, and hence by at least the
amount and dispensation of their salaries, the fiscal system
could not be neutral to the market economy. For even if A, B,
C, and so on, paid and received the equivalent amounts, bureaucrats
B1, B2, B3, and so on, would be net tax-recipients, and in essence,
would be paying no taxes at all. Their net incomes functioning
in the bureaucracy will necessarily have to be subtracted from
the net incomes of other members of society. And therefore the
very existence and operation of government, as John C. Calhoun
brilliantly pointed out, establishes at the very least a class
struggle between the net tax-recipients and the net taxpayers.
Calhoun’s analysis is worth quoting at length:

So deeply
seated, indeed, is this tendency to conflict between the different
interests or portions of the community that it would result
from the action of the government itself, even though it were
possible to find a community where the people were all of
the same pursuits, placed in the same condition of life, and
in every respect so situated as to be without inequality of
condition or diversity of interests. The advantages of possessing
the control of the powers of the government, and thereby of
its honors and emoluments, are, of themselves, exclusive of
all other considerations, ample to divide even such a community
into two great hostile parties…. And what makes this evil
remediless through the right of suffrage of itself … is
the fact that, as far as the honors and emoluments of the
government and its fiscal action are concerned, it is impossible
to equalize it. The reason is obvious. Its honors and emoluments,
however great, can fall to the lot of but a few, compared
to the entire number of the community and the multitude who
will seek to participate in them. But without this there is
a reason which renders it impossible to equalize the action
of the government so far as its fiscal operation extends….

Few,
comparatively, as they are, the agents and employees of the
government constitute that portion of the community who are
the exclusive recipients of the proceeds of the taxes. Whatever
amount is taken from the community in the form of taxes, if
not lost, goes to them in the shape of expenditures or disbursements.
The two — disbursement and taxation — constitute the fiscal
action of the government. They are correlatives. What the
one take from the community under the name of taxes is transferred
to the portion of the community who are the recipients under
that of disbursements. But as the recipients constitute only
a portion of the community, it follows, taking the two parts
of the fiscal process together, that its action must be unequal
between the payers of the taxes and the recipients of their
proceeds. Nor can it be otherwise; unless what is collected
from each individual in the shape of taxes shall be returned
to him in that of disbursements, which would make the process
nugatory and absurd. Taxation may, indeed, be made equal,
regarded separately from disbursement. Even this is no easy
task; but the two united cannot possibly be made equal.

Such being
the case, it must necessarily follow that some one portion of
the community must pay in taxes more than it receives back in
disbursements, while another receives in disbursements more
than it pays in taxes. It is, then, manifest, taking the whole
process together, that taxes must be, in effect, bounties to
that portion of the community which receives more in disbursements
than it pays in taxes, while to the other which pays in taxes
more than it receives in disbursements they are taxes in reality
— burdens instead of bounties. This consequence is unavoidable.
It results from the nature of the process, by the taxes ever
so equally laid….

Nor would
it be less a bounty to the portion of the community which received
back in disbursements more than it paid in taxes because received
as salaries for official services, or payments to persons employed
in executing the works required by the government, or furnishing
it with its various supplies, or any other description of public
employment — instead of being bestowed gratuitously. It is the
disbursements which give additional and, usually, very profitable
and honorable employments to the portion of the community where
they are made … and hence, to the extent that the disbursements
exceed the taxes, it may be fairly regarded as a bounty. The
very reverse is the case in reference to the portion which pays
in taxes more than it receives in disbursements. With them profitable
employments are diminished to the same extent, and population
and wealth correspondingly decreased.

The necessary
result, then, of the unequal fiscal action of the government
is to divide the community into two great classes: one consisting
of those who, in reality, pay the taxes and, of course, bear
exclusively the burden of supporting the government; and the
other, of those who are the recipients of their proceeds through
disbursements, and who are, in fact, supported by the government;
or in fewer words, to divide it into taxpayers and tax-consumers.

But the
effect of this is to place them in antagonistic relations
in reference to the fiscal action of the government and the
entire course of policy therewith connected. For the greater
the taxes and disbursements, the greater the gain of the one
and the loss of the other, and vice versa; and consequently,
the more the policy of the government is calculated to increase
taxes and disbursements, the more it will be favored by the
one and opposed by the other.

The effect,
then, of every increase is to enrich and strengthen the one,
and impoverish and weaken the other. [73]

Thus if a
bureaucrat receives an income of $30,000 per year, and pays $10,000
to the government in taxes, he is in reality not paying taxes
at all. His tax payment is a bookkeeping fiction; in reality,
he is simply a net tax-consumer to the tune of $20,000.

Calhoun
has thus shown that the very existence of taxation creates at
least two conflicting classes: the ruling and the ruled, and
that the ruling class are the net tax-consumers and the ruled
the net taxpayers. The ruling classes comprise the full-time
politicians and bureaucrats receiving government salaries, as
well as the private sellers of goods and services to the governments
or recipients of outright government subsidy. There is hence
no way for government or for taxation to be neutral. Moreover,
the greater the amount and degree of taxation/expenditures by
government, the more important will be this unneutrality, this
diversion of output and income from producers on the market
to the State and the receivers of its largess. The greater the
extent of government operation, therefore, the greater the class
conflict in the society.

Proportional
Taxation

Setting
aside for a moment the problem of inherent nonneutrality stemming
from the existence of taxation and expenditures, let us examine
further the specific types or forms of taxes. Is there any form
that might be called neutral to the market? Many economists
have assumed that proportional taxation for each taxpayer (whether
on incomes, property, or intangible "sacrifice") will
leave the distribution of income or wealth the same as before,
and therefore be neutral to the market. Thus to Edwin Cannan
proportional property taxation serves as a "sufficiently
accurate standard" of neutrality, so that "the distribution
of wealth between individuals" is the same as "it
would be in the absence of State action."
[74]
To Blum and Kalven, proportional sacrifice, presuming
this intangible could be measured, has "the virtue …
that it remains neutral as to the relative distribution of satisfactions
among taxpayers. Under it they are all equally ‘worse off’ after
taxes." [75]

At first
blush, proportionality appears to leave market distribution
the same. If, for example, a tax of 10 percent is levied on
all incomes, is not the distribution of incomes left the same
(setting aside the above insoluble problem of net tax-consumers)?
It is true that if A earns $30,000 a year, B earns $20,000,
and C earns $10,000, and each pays 10 percent, the relative
proportions of their income after taxes will remain the same
as before ($27,000, $18,000, and $9,000). But this question
misconceives the very idea of the neutral tax. The point of
a tax neutral to the market is not to leave the income distribution
the same as if a tax had not been imposed. The point of a neutral
tax is to affect the income "distribution" and all
other aspects of the economy in the same way as if the tax were
a free-market price. Only if a tax has the effect of a surrogate
free-market price, only if, in a profound sense, it is part
of the market, could it be neutral to that market. And it
should be evident that no free-market price leaves income distribution
the same. If every market price were proportional to the income
of the purchaser, if David Rockefeller had to pay $1,000,000
for a box of Wheaties, then there would be no point in having
a higher income, and we would have an extraordinarily complex
and unworkable form of compulsory equality of incomes.

The market
does not form prices proportional to incomes; the market is
characterized by uniform pricing, by a strong tendency toward
the same price for the same good or service regardless of the
income or personality of the buyer. [76]

Taxation
and Benefits

If the
market charges all consumers the same price for a particular
service, it would seem that some form of equal (rather than
equiproportional) taxation might be neutral to the market. One
time-honored criterion attempting to arrive at such neutrality
is the "benefit" principle: that each should pay taxes
in accordance with the benefits he receives from the State.
Those receiving the same benefits would pay the same amount
of tax. There are many grave problems with this approach, however.
First, in contrast to the marketplace, there is no way whatever
for an external observer to gauge anyone’s benefits as derived
from government. Since "benefits" are subjective,
we cannot measure anyone’s benefit on the market either, but
we can conclude, from a person’s voluntary purchase, that his
(expected) benefit was greater than the value to him of the
money given up in exchange. If I buy a newspaper for 25 cents,
we can conclude that my expected benefit is greater than a quarter.
But since taxes are compulsory and not voluntary, we can conclude
nothing about the alleged benefits that are paid for with them.
Suppose, in analogy, that I am forced at gunpoint to contribute
25 cents for a newspaper and that that newspaper is then forcibly
hurled at my door. We would be able to conclude nothing about
my alleged benefit from the newspaper. Not only might I be willing
to pay no more than 5 cents for the paper, or even nothing on
some days, I might positively detest the newspaper and would
demand payment to accept it. From the fact of coercion there
is no way of telling. Except that we can conclude that many
people are not getting 25 cents’ worth from the paper or indeed
are positively suffering from this coerced "exchange."
Otherwise, why the need to exercise coercion? Which is all that
we can conclude about the "benefits" of taxation.
[77]

To Adam
Smith, the benefit principle dictated proportional income taxation:
"The subjects of every state ought to contribute toward
the support of government, as nearly as possible .. . in proportion
to the revenue which they respectively enjoy under protection
of the state." [78]

Other writers
have even used the benefit principle to justify progressive taxation.
Yet there is no warrant whatever for assuming equi-, or even more
than, proportional benefit from government. In one model the alleged
benefit from government is to be simply deduced from one’s income,
and it is claimed that this indicates a proportionately greater
"benefit from society." But there are many flaws with
this approach. For first, since everyone benefits from participating
in society, the fact that A earns more than B must be attributed
to individual differences in ability or productivity rather than
to the benefits of society. And second, "society" —
the pattern of voluntary exchanges of goods and services — is
most emphatically not identical to the State, the coercive extractor
of taxation.

If, indeed,
we are to tax people in accordance with their benefit from government,
we would have to tax all the net tax-consumers to the amount of
their subsidies. We would have to tax 100 percent of the salaries
of bureaucrats, of the incomes of welfare recipients and of defense
contractors, and so on. We would then have our ideal model of
the neutral tax where all recipients of government funds would
systematically repay them to the taxpayers — an absurd if rather
charming state of affairs. If we leave subsidies to concentrate
only on supposedly common services such as police protection,
then we would have to conclude that the poor benefit far more
from police protection than the wealthy, since the wealthy could
far better afford to pay for their own protection. We would therefore
have to conclude, not that the rich benefit as much as or more
than the poor, but far less. We would have to conclude that the
poor and the infirm, far more in need of protection than the rich,
should be taxed far more heavily than the rich and the able-bodied.
[79]

Moreover,
the market is misconstrued by the benefit principle. For on
the market people do not pay in accordance with benefits received.
The chess addict and the indifferent players pay the same price
for the same chess set, and the opera enthusiast and the novice
pay the same price for the same ticket. On the market, people
tend to pay the same price for the same good, regardless of
benefit. The poor and the weak might be the most eager for protection,
but, in contrast to the benefit principle, they would not pay
more for the same degree of protection on the market. And finally,
everyone on the market enjoys a net benefit from exchange. If
the entire benefit were taxed away (assuming this subjective
concept could be measured), then this practice would totally
violate market principles, where net benefits from exchange
are always maintained.

The
Equal Tax

If the
market means having everyone pay the same price for the same
service, perhaps then each person should pay the same tax, equal
in absolute amount? The equal tax, or "poll tax,"
is surely a far closer approximation to neutral taxation than
any of the more common forms of taxation. It would indeed preserve
the market principle of same price for same service. It would
also be particularly appropriate for a democratic polity, where
one person, one vote prevails, or for a regime that attempts
to adhere to the principle of "equality before the law." [80]

But even
the equal tax cannot be said to be neutral to the market. In
the first place, it is impossible for observers outside the
market, such as government, to gauge what service is "equal"
to another service. Equality of service is not technological
identity but similarity in the minds of the consumers. Only
the free market, then, can determine different qualities or
degrees of a service. Second, and even more important, there
is no indication that for a particular taxpayer, the government
is supplying a "service" at all. Since the tax is
compulsory, it may well be that the "service" has
zero or even negative value for individual taxpayers. Thus,
a pacifist, philosophically opposed to any use of violence,
would not consider a tax levied for his and others’ police protection
to be a positive service; instead, he finds that he is being
compelled, against his will, to pay for the provision of a "service"
that he detests. In short, equal pricing on the market reflects
demands by consumers who are voluntarily paying the price, who,
in short, believe that they are gaining more from the good or
service than they are giving up in exchange. But taxation is
imposed on all people, regardless of whether they would be willing
to pay such a price (the equal tax) voluntarily, or indeed whether
they would voluntarily purchase any of this service at all.

The poll
tax works particular hardship on those who would not ordinarily
be participating in the market economy. Hence it (as well as the
income tax) is payable in money and has been used as a fearsome
whip to force natives in undeveloped countries out of subsistence
or barter production and into working for money wages. Working
for capitalists becomes the only way these natives can pay the
tax. Thus Sir Percy Girouard, the British governor of Kenya, freely
admitted, in the early twentieth century, that taxation was levied
on the native to force him to go to work for British employers.
The hut tax "is the only method," opined Sir Percy,
"of compelling the native to leave his reserve for the purpose
of seeking work. Only in this way can the cost of living be increased
for the native." [81] In the Congo Free State, the problem in that Belgian colony,
as Parker Moon put it, was: "Would the natives willingly
go out into the jungle to collect rubber and tusks for the State?"
For, "little appreciating the dignity of labor, the Congo
negroes evinced a marked distaste for the task which their humane
sovereign expected them to perform. Accordingly, another civilized
innovation was introduced — taxes." [82] Moon illuminates the relationship
between taxation and forced labor in colonial countries:

In tropical
Africa … the problem is how to make the natives work at
all, for Europeans. Actual slavery is everywhere condemned,
and vanishing…. Compulsory labor, once the fashion in Central
Africa, is falling more and more under censure, though it
is still utilized by governments when they need natives for
railroad or road construction, or other public works….

Taxation
is a favorite method of stimulating native industry. In many
African colonies hut and poll taxes are imposed, ranging from
fifty cents to several dollars per capita. The amount seems
small enough, by our standards, but to the negro without money
it is a large sum. He can earn it by working on a plantation
or in a mine, for white employers, at wages that vary from
five cents a day, or less, in Congo, Northern Rhodesia, and
other regions, to six or seven cents in Kenya, perhaps twenty
cents in the interior of Nigeria, and fifty cents or more
in South Africa. At such wages it takes a native months to
save enough to pay the tax for his family.
[83]

Conclusion

Free-market
economists have successfully extended their critical analyses
of government to all areas of State operation and intervention
— all except one. Taxation, the heart and soul of government,
has escaped unscathed. Free-market economists have either avoided
the topic of taxation altogether or have provided concepts that,
while claiming to help limit government, have in reality offered
apologies for the extension of State power. The view that income
taxes are "better" than excise taxes; the call for
proportional or degressive income taxation; the Friedman negative
income tax; the Buchanan-Tullock Unanimity Principle; and the
collective-goods, external-benefits, and transaction costs arguments
for government and taxation, have all served to place the imprimatur
of economics on the status quo or on extensions of government
rather than to limit or roll back State power. All this has
followed the course traced by Bertrand de Jouvenel three decades
ago: From the idea of divine right down to modern times concepts
originally meant to limit State power have been turned by the
State and its advocates into rationales for its further extension. [84]

Much the
same thing has happened to the noble concept of neutral taxation.
The idea that taxation, and therefore government’s fiscal operation,
should be neutral to the market — should not disturb the operations
of the market nor divert it from its free course — is a noble
but impossible one. As we have seen here, taxation can never be
neutral to the market, and the impossibility of this dream is
rooted in the very nature of taxation and government. Neutral
taxation is merely a chimera. It is perhaps because of this impossibility
that this concept, in the hands of the modern public-choice theorists
and others, has so quickly become yet another device for ratifying
the status quo of State power.

We are
forced, then, to the realization of crucial points from which
free-market economists seem to have been fleeing as from the
very plague. That neutral taxation is an oxymoron; that the
free market and taxation are inherently incompatible; and therefore
either the goal of neutrality must be forsaken, or else we must
abandon the institution of taxation itself.

Notes

[1] Thus lobbying or other government-related activities
by any business firm would not be neutral to the market.

[2] On the structure of production and capital, see
among other works, Eugen von Bhm-Bawerk, Capital
and Interest
, 3 vols (South Holland, Ill: Libertarian
Press, 1959), and Ludwig M. Lachmann, Capital
and Its Structure
(Kansas City: Sheed Andrews and McMeel,
1978).

[3] Both would be determined by the social rate of
time preference as determined on the market, the premium of
present as compared with future goods — an agio which would
be the resultant of all the time-preference schedules by individuals
on the market, in much the same way as consumer demand is the
embodiment of the marginal-utility schedules of individuals.
See Murray N. Rothbard, Man,
Economy, and State
, 2nd ed. (Los Angles:
Nash, 1970), 1, chap. 6; Frank A. Fetter, Capital,
Interest, and Rent: Essays in the Theory of Distribution

(Kansas City: Sheed Andrews and McMeel, 1977), pt. 2.

[4] That is, each unit of each factor will tend to
receive its discounted marginal revenue product, its marginal
value productivity discounted by the rate of interest. So
each unit of land and labor will tend to receive its DMRP,
and the capitalist (or lender) will receive the discount (in
the form of interest or long-run profit). Only in the never-never
land of general equilibrium would each factor always receive
its DMRP; in the real world, the positive or negative differences
would reflect entrepreneurial profits and losses. See Rothbard,
Man, Economy, and State, chap. 7.

[5] On the concept and implications of "demonstrated
preference," see Murray N. Rothbard, "Toward a Reconstruction
of Utility and Welfare Economics" (New York: Center for
Libertarian Studies, 1977), esp. pp. 2–7, 26–30; reprinted in
The
Logic of Action One
.

[6] This, however, is a long way from saying, with
conventional neoclassical economists, that general equilibrium
and perfect knowledge are facts of reality, or, with the rational-expectations
economists, that the market always perfectly forecasts the future.
If this were true, there would be no room for entrepreneurship
at all, and the most dynamic and vital aspect of the market
economy would go unremarked and unexplained. See Gerald P. O’Driscoll,
Jr., "Rational Expectations, Politics, and Stagflation,"
in Time,
Uncertainty, and Disequilibrium: Exploration of Austrian Themes
,
Mario J. Rizzo, ed. (Lexington, Mass: Lexington Books, 1979),
pp. 153–76.

[7] For convenience, "members" and "donors"
shall be used interchangeably throughout, although in many
cases donors are technically not "members" of the
organization.

[8] The lack of precise guidance in nonprofit organizations
is not a criticism of their existence; this lack is simply
a part of the nature of the case, and it is taken into account
by the donors when they make their "investment"
decisions in the organization.

[9] In a trivial sense, of course, being willing to
accept a free gift by a charity is also a demonstration of
preference by the recipient, but only in the trivial sense
that he prefers more of a good to less. The recipient is not
sacrificing any good or service in exchange.

[10] It is curious that statist critics of the market
invariably denounce "production for [monetary] profit"
as greedy and selfish, and instead uphold "production
for use" as unselfish and altruistic. On the contrary,
producers can only make monetary profits to the extent that
they serve other consumers. Logically, altruists should
deeply admire the successful pursuit of monetary gain on the
market.

It
is also curious that many writers believe that the maximum-(monetary)-profit
assumption for business motivation may have been true for
personally owned nineteenth-century firms, but that it no
longer holds for the modern corporation. On the contrary,
it is precisely the modern corporation where "impersonality"
of investment and producer decision will tend to dominate,
since the personal wishes of single owners are no longer nearly
as important. Unprofitable nepotism, for example, is far more
likely to reign in the mom and pop store than in the large
corporation.

[11]

[12] Burglars, as distinct from robbers, do not confront
their victims directly and so present him with no choice;
but they employ physical coercion by seizing his property
without his consent.

[13] Franz Oppenheimer, The
State
(New York: Vanguard Press, 1926), pp. 24–27.

[14] Ibid.

[15] Albert Jay Nock, On
Doing the Right Thing, and Other Essays
(New York: Harper
and Bros., 1928), p. 145.

[16] Mises, Human Action, p. 196.

[17] Ibid, p. 197.

[18] Ibid., p. 198. This is not to imply that Mises
believed that the State could or should be abolished; instead,
he believed that the world should be preponderantly
a product of contractual relations. (Italics mind.)

[19] We speak here of "voluntary" in the
nontrivial sense that distinguishes it from the "involuntary"
or "coerced" payment to thieves.

[20] In the preceding sentence, Schumpeter wrote:
"The state has been living on a revenue which was being
produced in the private sphere for private purposes and had
to be deflected from these purposes by political force."
Joseph A. Schumpeter, Capitalism,
Socialism, and Democracy
(New York: Harper and Bros.,
1942).

[21] John R. Hicks, "The Valuation of the Social
Income," Economica (May 1940), cited in Alex Rubner,
Three
Sacred Cows of Economics
(New York: Barnes and Noble,
1970), p. 54.

[22] Hicks to Rubner, Sept 28, 1966. In Rubner, Sacred
Cows, p. 54n.

[23] James M. Buchanan, The
Public Finances
, 3rd ed. (Homewood, Ill.:
Richard d. Irwin, 1970), pp. 62–63.

[24] After identifying the essence of government
as coercion, and after carefully analyzing each type of government
and "political entrepreneurship," Montemartini concludes
that "there are no public, or collective needs in the strict
sense of the word, as opposed to private needs. It is always
real individuals who calculate the advantages of imposing on
the community the production of certain specific goods."
And these individuals’ valuations will differ; "The calculations
of economic advantage differ from one associate to another when
it comes to determining the needs to be satisfied collectively."
Hence, the production of "collective goods" is always
coercive: "The collectivization of the satisfaction of
some needs always aims at a participation in the costs of economic
units which would not voluntarily have so participated."
Giovanni Montemartini, "The Fundamental Principles of a
Pure Theory of Public Finance," in Classics
in the Theory of Public Finance
,Richard Musgrave and
Alan Peacock, eds. (New York" Macmillan, 1958), pp. 150–51.

[25] Kenneth D. Goldin, "Equal Access vs. Selective
Access: A Critique of Public Goods Theory," Public
Choice 29 (Spring 1977): 60.

[26] Ibid., pp. 65–66.

[27] Ibid., pp. 60–61.

[28] Ibid., p. 61. Goldin amusingly adds: "A
medieval lord could scarcely be a ‘free rider’ on a neighboring
lord’s defense efforts. If he did not have his own defenses,
he would probably suffer attacks from his neighbor."
Cf. Wicksell: "Side by side with the national army, many
countries have voluntary rifle clubs and similar institutions
which sometimes constitute no mean military force." Knut
Wicksell, "A New Principle of Just Taxation," in
Classics in the Theory of Public Finance, Musgrave
and Peacock, eds., p. 90.

[29] Goldin, "Equal Access vs. Selective Access,"
pp. 61–62.

[30] Buchanan, Public Finances, pp. 25–26.
Buchanan errs, however, in claiming that "few persons"
would place a negative value on internal law and order. Pacifists
would, and how "few" they may be will vary, and
their number is unknown in any case. Even the existence of
one pacifist negates the very concept of defense as a collective
good, just as the existence of one anarchist negates the very
concept of a collective good supplied by the State.

[31] Ibid., p. 23.

[32] Paul A. Samuelson, Economics, 6th
ed. (New York: McGraw-Hill, 1964), p. 159. In his 10th
edition, Samuelson, perhaps in an unacknowledged response
to Professor Coase’s noteworthy article (see below), gives
the case away by adding, after "from each user"
the words "without great difficulty" (p. 160). For
he thereby concedes that lighthouses are not "collective
goods."

[33] "The tolls were collected at the ports
by agents (who might act for several lighthouses)…. The toll
varied with the lighthouse and ships paid a toll, varying
with the size of the vessel, for each lighthouse passed. It
was normally a rate per ton (say 1/4d or 1/2d) for each voyage.
Later, books were published setting out the lighthouses passed
on different voyages and the charges that would be made."
Ronald H. Coase, "The Lighthouse in Economics,"
Journal of Law and Economics 17 (October 1974): 364–65.

[34] Goldin, "Equal Access vs. Selective Access,"
p. 62.

[35] Coase, "The Lighthouse in Economics,"
p. 375. As Goldin remarks, "Lighthouses are a favorite
textbook example of public goods, because most economists
cannot imagine a method of exclusion. (All this proves is
that economists are less imaginative than lighthouse keepers.)"
Goldin, "Equal Access vs. Selective Access," p.
62.

[36] Since commercial airports are all owned by (largely
municipal) government, the pricing of their runway and other
services is scarcely akin to market pricing; generally, landing
and takeoff fees are set far too low to clear the market, and
the resulting shortage is rationed by increased and dangerous
air congestion. See Ross D. Eckert, Airports
and Congestion
(Washington, D.C.: American Enterprise
Institute, 1972).

[37] See Goldin, "Equal Access vs. Selective
access," pp. 64–65.

[38] Ibid., pp. 63–64.

[39] Ibid., p. 54.

[40] Cf., Melvin W. Reder, "Review of Baumol’s
Welfare
Economics
and the Theory of the State
," Journal of Political
Economy (December 1953): 539.

[41] Gustave de Molinari, The
Society of Tomorrow
(New York: G.P. Putnam’s Sons, 1904),
pp. 71–72, 84–86. In earlier years, this Belgian-born nineteenth-century
French economist believed that all services now supplied by
government could be supplied better and more efficiently by
privately competitive firms on the free market. See Gustave
de Molinari, The Production of Security (New York: Center for
Libertarian Studies, May 1977); and David M. Hart, "Gustave
de Molinari and the Anti-Etatiste Liberal Tradition" (history,
honors thesis, Macquarie University, Australia, 1979).

[42] Spencer Heath, Citadel,
Market and Altar
(Baltimore, Maryland: Science of Society
Foundation, 1957). For the most developed work on the Heathian
proposal, see Spencer Heath, The
Art of Community
(Menlo Park, California: Institute
for Humane Studies, 1970). Disney World is a spectacular example
of a successful business firm supplying all of these services
out of tourists’ fees.

[43] Thus see Joseph R. Peden, "Property
Rights in Celtic Irish Law
," Journal of Libertarian
Studies 1 (Spring 1977): 81–95; Bruno Leoni, Freedom
and the Law
(Los Angeles: Nash, 1972); and William C.
Wooldridge, Uncle
Sam the Monopoly Man
(New Rochelle, NY: Arlington House,
1970).

[44] Gordon Tullock advances the curious argument
that revolutions are impossible (or virtually so) because
individual revolutionaries work and sacrifice whereas the
entire public reaps the benefits; hence the public are free
riders on the efforts of revolutionaries. (Gordon Tullock,
"The Paradox of Revolution," Public Choice 9
[Fall 1971]: 89–99.) If he were consistent, Professor Tullock
should therefore advocate that government tax people and subsidize
revolutionaries in order to solve the problem of "underproduction
of revolution!" In point of fact, of course, revolutions
do take place from time to time, and they occur because
much of the public has placed high on their values scales
the success of the revolution. In short, a strongly held ideology
among the public can overcome the free-rider problem for revolution.
People’s "interest" is not only job or immediate
monetary payment, but also the attainment of such concepts
as justice, liberty, and so on, none of which has any place
in the economic calculus of the public-choice theorists.

[45] Herbert Spencer, Social
Statics
(London: John Chapman, 1851), chap. 19, "The
Right to Ignore the State," pp. 206–16.

[46] Herbert Spencer, An
Autobiography
(New York: d. Appleton, 1904), 1, pp.
417–18.

[47] "S.R.," "Spencer as His Own Critics,"
Liberty 14 (June 1904): 2.

[48] Attacking the late Spencer’s argument, in Man
vs. the State, for taxation for defense based on the free
rider, "S.R" points out that that Spencer "overlooked
the fact that there are several methods of securing cooperation
for necessary ends, some manifestly non-aggressive and consonant
with the principle of equal freedom. It is, of course, unfair
for any man to enjoy the benefits of peace and stability while
declining to share the risks, sacrifices, and burdens entailed
by actual and probable attacks from within or without; but
such an unsocial and mean-spirited individual can be brough
to terms by the boycott, material and moral." "S.R.,"
"Spencer and Political Science," Liberty
14 (February 1904): 2.

[49] I am indebted to Dr. David Gordon of the Center
for Libertarian Studies for pointing this out to me.

[50] Even Professor Buchanan, one of the founders
of public-choice theory, admits the subjectivity and hence the
noncomparability of costs. James M. Buchanan, Cost
and Choice: An Inquiry in Economic Theory
(Chicago:
Markham, 1969).

[51] If transaction costs are to be absolute and
override all other considerations, then the transaction cost
theorists are taking the very same position they deride in
ethicists: that is, rendering their values absolute, with
no trade-off for other values. If transaction-cost economists
are to scorn ethicists for ignoring cost-benefit considerations,
why are they to be allowed to ignore ethics?

[52] Professors Buchanan and Tullock and the public-choice
theorists are the outstanding modern proponents of this theory,
which was also enunciated by Professor Baumol. See William J.
Baumol, Welfare
Economics and the Theory of the State
(Cambridge, Mass.:
Harvard University Press, 1952), and idem, "Economic theory
and the Political Scientist," World Politics (January
1954): 275–77.

[53] See Rothbard, Toward
a Reconstruction of Utility and Welfare Economics
, pp.
33ff. On collective goods and external benefits, also see Rothbard,
Man, Economy, and State, 2, pp. 883–90.

[54]

[55] Ibid., p. 211.

[56] Ibid., pp. 211–12.

[57] Knut Wicksell, "A New Principle of Just
Taxation," in Classics
in the Theory of Public Finance
, Musgrave and Peackock,
ed., p. 109.

[58] Ibid.

[59] Thus, "S.R."’s critique of the later
Spencer’s argument for compulsory military service, compulsory
justice, and compulsory taxation, to the effect that there
is "virtual unanimity" behind these forms of State
action, pointed out: "The word virtual is fatal. The
question is evaded, not answered. Has the one man, or the
insignificant group of men, that refuses to support the State,
even in the simplest of its functions, the right to stand
alone, to ignore it? Spencer never refuted his own early demonstration
of this right." "S.R," "Spencer and Political
Science," p. 2.

[60] Here we might note the curious position of Laffer-Wanniski
that the tax rate that maximized government revenue along the
"Laffer curve" is, for some obscure reason, the point
at which the electorate desires to be taxed. (Italics Wanniski’s.)
Jude Wanniski, "Taxes, Revenues, and the ‘Laffer Curve’"
in The
Economics of the Tax Revolt
, Arthur Laffer and Jan Seymour
(New York:" Harcourt Brace Jovanovich, 1979), p. 8.

[61] Jean-Baptiste Say, A
Treatise on Political Economy
, 6th ed.
(Philadelphia: Claxton, Remsen and Haffelfinger, 1880), pp.
412–13.

[62] Ibid., p. 413.

[63] Ibid., p. 413n. Say likens government to a robber
at another point. He states that government’s claim to a right
over individual property, which it makes through taxation,
is pure usurpation. The government is no more the proper owner
of its claimed property than a thief over the property he
has robbed. Ibid., p. 414n.

[64] Ibid., pp. 414–15.

[65] Ibid., p 446.

[66] Ibid., p. 447.

[67] Ibid., pp. 447, 447n–448n.

[68] Ibid., p. 452n. In a charming aside, Say chides
Ricardo for erring because of his penchant for introducing
"the unbending maxims of geometrical demonstration."
For, "in the science of political economy, there is no
method less worthy of reliance."

[69] Ibid., p. 447.

[70] Ibid., p. 449. Here we may note with amusement
Frdric Bastiat’s reaction to these passages of Say. In the
light of Bastiat’s reputation as a laissez-faire extremist"
in contrast to Say’s "moderation," we might note that
Bastiat was shocked at the extremism of Say’s views: Doesn’t
the State supply some services to the public? Frederic Bastiat,
Economic
Harmonies
(Princeton, N.J.: D Van Nostrand, 1964), p.
567.

[71] In a famous passage, Thoreau wrote: "I
heartily accept the motto — ‘That government is best which governs
least,’ and I should like to see it acted up to more rapidly
and systematically. Carried out, it amounts to this, which also
I believe — ‘that government is best which governs not at all.’"
Or, as Tucker concluded succinctly: "That which governs
least is no government at all." Henry D. Thoreau, "Civil
Disobedience" [1849], in Walden
and Other Writings
(New York: Modern Library, 1937),
p. 635; Benjamin R. Tucker, Instead
of a Book
(New York: B.R. Tucker, 1893), p. 14.

[72] Thus Ludwig von Mises, by far the most thoughtful
and systematic of free-market economists, devotes only a few
unsatisfactory paragraphs to the subject of a neutral tax,
or indeed to taxation in general While conceding the impossibility
of a neutral tax in the real world, he maintains without demonstration
that it would be possible in a world of general equilibrium.
And, despite its conceded impossibility, he seems to advocate
pursuing the neutral tax as an ideal. (He also does not explain
why everyone’s income would be equal in general equilibrium.)
Apart from this, Mises maintains that taxes, despite "directly
curtail[ing] the taxpayer’s satisfaction," are "the
price he pays for the services which government renders to
… each of its members." He warns that taxes should remain
"low," but the only criterion offered for this lowness
is that they "do not exceed the amount required for securing
the smooth operation of the government apparatus"; in
that case, "they are necessary costs and repay themselves."
We may here reiterate all the questions we’ve discussed above,
emphasizing such problems as: How much service? To which
members? How about pacifists? Who pays the necessary costs
and who gets repaid and then some? And what exactly
is the "smooth operation of the government apparatus,"
and [why] should that be the overriding desideratum? Mises,
Human Action. Pp. 730–31, 733–34, 738.

[73] John C. Calhoun, A
Disquisition on Government
(New York: Liberal arts Press,
1953), pp. 14–18.

[74] Edwin Cannan, "Minutes of Royal Commission
on Local Taxation," 1899," in Readings
in the Economics of Taxation
, Richard Musgrave and Carl
Shoup, eds. (Homewood, Ill: Irwin, 1959), pp. 182–83.

[75] Walter Blum and Harry Kalven, Jr., The
Uneasy Case for Progressive Taxation
(Chicago: University
of Chicago Press, 1953), p. 44.

[76] A similar critique could be leveled against
any form of proportional tax, for example, on sales or property.

[77] In contrast to benefit theory, which navely
assumes that people "purchase" government services
in much the same way as they purchase goods and services on
the market, at least sacrifice theory assumes in the words
of Blum and Kalven, "that the taxes are a necessary evil
falling up on a distribution of money, and therefore upon
a distribution of satisfactions, which is otherwise acceptable."
Uneasy Case for Progressive Taxation, p. 44. The basic
problem with sacrifice theory is that it doesn’t explain why
people must bear the burdens of sacrifices of taxation, why
that is, we must turn from talk of benefits and free choice
on the market to talk to burden and sacrifice in the sphere
of government.

[78] Adam Smith, The
Wealth of Nations
(New York: Modern Library, 1937),
p. 777. Smith added immediately that "the expense of government
to the individuals of a great nation, is like the expense of
management to the joint tenants of a great estate, who are all
obliged to contribute to their respective interest in the estate."
Presumably, however, these tenants also get benefits from the
estate greater than their pro-rata expenses, and if they do
not, or even if they do, they can sell their share and leave
— an option not available to the taxpayer.

[79] Mill put the case very well: "If we wanted
to estimate the degrees of benefit from the protection of government
we should have to consider who would suffer most if that protection
were withdrawn: to which question if any answer could be made,
it must be, that those would suffer most who were weakest in
mind or body, either by nature or by position. Indeed, such
persons would almost infallibly be slaves. If there were any
justice, therefore, in the theory of justice now under consideration,
those who are least capable of helping or defending themselves,
being those to whom the protection of government is the most
indispensable, ought to pay the greatest share of its price."
John Stuart Mill, Principles
of Political Economy

(New York: D. Appleton, 1901), 2, pp. 398.

[80] In recent years, the poll tax was used to designate
a voting requirement, in effect a tax on voting, in the southern
states. But originally, the poll tax was simply an equal tax
per head, and the payment for voting was simply one method of
enforcing the tax. On poll taxes, see Merlin H. Hunter and Harry
K. Allen, Principles of Public Finance (New York: Harper
and Bros., 1940), pp. 265–70. Many early poll taxes were graduated
rather than uniform. C.F. Bastable, Public Finance (London:
Macmillan, 1895), pp. 433–34.

[81] Cited in Parker T. Moon, Imperialism
and World Politics
(New York: Macmillan, 1930), p.
132. In South West Africa, the British accomplished the same
purpose with a dog tax, levied per native dog. "Many
of the natives, of course, were too poor to pay any such tax,
and consequently infour months over one hundreds members
of the Bondelzwarts tribe alone were condemned, for non-payment
of the tax, to pay a fine of two pounds or spend two weeks
in jail. To obtain the money for tax and fines, the natives
would have to work for white ranchers and mine-owners."
Ibid., p. 504.

[82] Ibid., p. 86.

[83] Ibid., p. 563.

[84] Bertrand de Jouvenel, On
Power, Its Nature and the History of Its Growth
(New
York: Viking Press, 1949).

Murray
N. Rothbard

(1926–1995) was dean of the Austrian School, founder of modern
libertarianism, and chief academic officer of the Mises
Institute
. He was also editor – with Lew Rockwell –
of The
Rothbard-Rockwell Report
,
and appointed Lew as his executor. See
Murray’s books.

Copyright
2013 by the Ludwig von Mises Institute.
Permission to reprint in whole or in part is hereby granted, provided
full credit is given.

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Best of Murray Rothbard

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