In Defense of the Windfall (Political) Profits Tax

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Nobel laureate Friedrich Hayek spent much of his scholarly life elaborating on the idea of "the pretense of knowledge." The pretense is the notion that in a highly decentralized, capitalist economy a single person, or a single committee, could possibly possess all of the localized knowledge that is normally possessed by the tens of thousands (or millions) of individuals who make up the economy and who are part of the international division of labor. This of course is a sheer impossibility, as is the ability of any individual or group to "plan" an economy based on such impossible-to-acquire knowledge. Only a decentralized, private property-based free market, guided by the price system, can do that.

This is one of the reasons why socialism never worked, nor can it ever work. Under the banner of socialism, the pretensions of politicians have caused many decades of poverty, starvation, and even genocide, as socialist dictator after dictator purged by the millions those citizens who did not go along with The Central Plan. (See The Black Book of Communism).

Our rulers in Washington are not quite in the Stalin/Hitler/Mao category, but they nevertheless embrace with all their being the pretense of knowledge. And whenever they act on this pretense, the results are typically disastrous. Recently, our rulers have announced that they possess unique knowledge — perhaps given to them, and them alone, by God — of what the "proper" amount of profit is in an industry. Any industry that, over the course of the business cycle, earns more than that amount deserves to be punished, or so they say.

Thanks to a growing population and a growing demand for oil, combined with temporary supply reductions caused by hurricanes and not-so-temporary supply restrictions caused by government regulation, gasoline prices have risen in the past year, causing oil industry profits to rise. But they have risen too much, say our pretentious rulers, who have proposed the resurrection of the disastrous, 1970s-era "windfall profits tax" (it was disastrous because in the wake of the OPEC supply cut-off what America needed was more oil production, not less, which is what the windfall profits tax caused).

If the windfall profits tax is enacted once again it will be harmful to the long-term production capacity of the industry, which will cause gas prices to then become higher yet. At that point our rulers will likely start calling for price controls, an even more disastrous and pretentious policy. Not to mention the fact that a windfall profits tax is also a pure act of legalized theft, plain and simple, no different than a Mafia shakedown.

But there is a case to be made for a kind of windfall profits tax: A tax on windfall political profits is indeed desirable. Our rulers cannot legally take home personally more than a minor share (in salary and perks) of the income they steal from us through taxation. But they "profit" from taxes nevertheless by using billions and billions of dollars to buy votes from various political constituencies in order to perpetuate their political careers. Then, in many cases, after spending years in Congress giving away our hard-earned dollars to various undeserving individuals and groups, they retire to earn large salaries from those very groups or to become lobbyists for the groups and use their political connections to keep this carnival of theft and plunder going. That is how our rulers profit personally from tax revenue.

If we are to have government, the only way to achieve any semblance of a free society is to reduce the "profits" of government to a bare minimum. As the great H.L. Mencken once wrote (from J.T. Farrell, ed., Prejudices: A Selection, p. 172):

[I]f experience teaches us anything at all it teaches us this: that a good politician, under democracy, is quite as unthinkable as an honest burglar. His very existence, indeed, is a standing subversion of the public good in every rational sense. He is not one who serves the common weal; he is simply one who preys upon the commonwealth. It is to the interest of all the rest of us to hold down his powers to an irreducible minimum, and to reduce his compensation to nothing. . . (emphasis added).

And with a growing economy, much of which is artificial growth spurred by the Fed’s inflationary policies, it is our politicians who have experienced unprecedented windfall "profits" in the form of the deluge of tax revenues which always occurs whenever the tax base is enlarged by economic growth. This has been occurring at all levels of government.

At the local level, economic growth, combined with the housing boom that has been instigated by the Fed with its low interest rate policies, has caused a tremendous windfall of property tax revenue, the main source of theft by local (and in some cases, state) governments. There is no better example of Taxation Without Representation, the rallying cry of the American Revolution. No politician ever had to vote to raise any of these taxes; they just enact what economists call an "elastic" tax system — one in which tax revenues collected tend to exceed the annual increases in personal income — and then wallow in political profit.

Moreover, since it has been at least 140 years since the Constitution provided any meaningful restrictions on the size and scope of government, as the founding fathers intended, it is imperative that Mencken’s advice be taken and that we do all that we can, in any way, to starve the state — or at least those who run the state — of revenue. Thus, I am calling for a crusade to enact a Windfall Political Profits Tax, starting with an immediate cut in pay of all politicians in America by at least 75 percent. In addition, the income tax ought to be abolished and replaced with nothing. No "flat tax," "consumption tax," or any other gimmick designed to further disguise the state’s legal plunder. The idea, after all, is to tax the state, which means to deprive it of revenue. The hell with "revenue neutrality," the phony idea that the state, unlike all other institutions in society, ought to never, ever, lose a single penny in revenue.

At the local level the property tax must be abolished as well. This is the only way the privatization of education could ever be achieved. Otherwise, all the school "reformers" are simply blowing smoke. All the campaigns to introduce competition into the "public" schools, or to privatize them, will forever fail because the opposition is funded with billions of dollars of property tax revenue. This must end if the diabolically disastrous government school monopoly is ever to be destroyed, as it must be.

Another item on the agenda should be to follow Connecticut’s lead and abolish counties altogether, along with myriad other forms of governmental "jurisdictions," from "special districts" to all the various "authorities" that combine to tax us to into serfdom. All of this would be a good start, but only a start.

Novembe 21, 2005

Thomas J. DiLorenzo [send him mail] is the author of The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, (Three Rivers Press/Random House). His latest book is How Capitalism Saved America: The Untold Story of Our Country’s History, from the Pilgrims to the Present (Crown Forum/Random House, August 2004).

Thomas DiLorenzo Archives at LRC

Thomas DiLorenzo Archives at Mises.org

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