Taxing and Spending

foundationsofeconomicsIn Chapter 16 of Foundations of Economics Shawn Ritenour gives a detailed discussion of the economic impact of taxation and government spending. Government participates in the monetary economy because it is the most efficient way for it to secure the economic goods it needs to realize its goals, whatever those may be. Taxation is a coerced levy paid to the government. Even if you believe that paying taxes is a religious or patriotic duty, you are still being coerced because you cannot not pay taxes without risking fines or imprisonment. Tax revenue is transferred to favored individuals or groups who provide goods and services the government desires. Taxation thus divides society into two classes: tax payers and tax consumers. Ritenour defines tax payers as those who pay more in taxes than they receive from government spending. Tax consumers are those who are net recipients of government spending. Under this definition, government employees, government contractors, etc., are tax consumers even if they pay a portion of their salaries back in taxes themselves. On the other hand, recipients of government grants and the like may in fact be tax payers if their tax bill exceeds the amount of government spending they receive.

One question I have regarding this schema is how to understand the status of anyone at a further remove from the actual government spending. For example, the owner of a downtown café in a state capital may derive the majority of his income from the patronage of state employees who eat lunch there every day. Is this man a tax consumer, or is he merely a tax payer who is part of the shifting of resources that results from government spending?

Ritenour specifies two economic results of taxation. First, it changes the allocation of resources from what it would have been in a free market. Tax payers are able to satisfy fewer of their wants because they have on net fewer resources with which to demand goods and services. Businesses and industries favored by tax payers earn less revenue and attract less capital. On the other hand, demand in tax-consuming industries rises, increasing returns and attracting investment. People who compete with the government for the products of tax-consuming industries must pay higher prices.

The second economic impact of taxation, according to Ritenour, is a severing of production from distribution. In the free market, a market participant’s demand is equal to his supply at the market price of the land, labor, and capital he owns. Government spending distorts this balance, artificially lowering the demand of tax payers (the relatively productive) and increasing the demand of tax consumers (the relatively unproductive).

Ritenour notes that some economists believe higher taxes are just fine because they may motivate people to work harder to maintain the net income they enjoyed before their taxes rose. While higher taxes may indeed motivate some to work harder, there is a price in terms of reduced leisure that will not show up in the economic statistics. The tax payer will be worse off than he was before.

Government spending has a significant economic impact beyond what was described above. In addition to being used to finance government activities, government spending is also used to promote certain favored social purposes through subsidies. If the government decides, for example, that print newspapers are critical to American life, but the newspapers can’t produce a viable business model, then the government might grant them a subsidy to keep them afloat. The subsidy reduces the incentive for capitalists to invest in industries other than the newspaper industry, and the result will be more newspapers than society demands, and fewer alternatives.

Ritenour devotes a substantial section to welfare payments to the low-income population and treats not only their economic impact, but also their appropriateness in view of Christian teaching. After citing several scriptures that affirm the Church’s responsibility to help the poor, Ritenour notes some important points. First, the Bible’s definition of a poor person is not the same as the modern State’s definition of a poor person. The former is absolute, whereas the latter is relative. Large percentages of people the U.S. government treats as poor enjoy many amenities hard to square with the poverty discussed in the Bible.

Second, because subsidies always lead to more of the subsidized activity, welfare programs lead to an increase in government-defined poverty. The direct effect of welfare payments is to reduce the opportunity cost of leisure time, and welfare recipients at the margin find their relatively modest welfare checks plus leisure more attractive than the slightly higher income they could earn by working full time in a low-skilled job. The long-term impact of these policies is that more people will never gain on-the-job skills that make their labor more valuable. Thus Ritenour concludes that welfare programs fail in their stated aims of reducing poverty; in fact, they increase it. Because of this and also because of the coercive means of financing these programs, he argues that Christians should reject them in favor of more direct action by individuals and churches to help the truly poor among us.

One other major component of government spending examined in this chapter is the spending intended to spur economic growth. Having already discussed the problems of Keynesianism a couple of chapters before, Ritenour focuses here on the fact that any money the government spends to stimulate the economy it must acquire from somewhere, either through taxation, borrowing, or inflation. The harmful effects of taxation and inflation (including the effects of borrowing from the banking system) have been established. When the government runs a deficit through borrowing from the non-bank public (via the sale of savings bonds and the like), it redirects capital from private investment to government consumption. This leads ceteris paribus to less capital, a shorter structure of production, and a lower standard of living. Moreover, when the loans must be paid back down the road, taxes must increase, causing even more disruption. The “we owe it to ourselves” canard is false; some citizens owe the debt to other citizens.

To sum up:

  1. Government taxation and spending distorts the division of labor.
  2. We get more of what we subsidize over time; therefore, wealth transfer programs will increase poverty.
  3. Government spending cannot grow the economy, but it can shrink it. The negative consequences of taxation, borrowing, and spending outweigh the localized benefits of the spending.

About Dr. J

I am Professor of Humanities at Faulkner University, where I chair the Department of Humanities and direct online M.A. and Ph.D. programs based on the Great Books of Western Civilization. I am also Associate Editor of the Journal of Faith and the Academy and a member of the faculty at Liberty Classroom.
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