Archive for January 4th, 2012

Since starting this blog, I’ve cited several columns by Walter Williams (see here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here), in large part because he’s so good at explaining economic concepts, but also because he’s very effective when demonstrating how big government undermines both freedom and prosperity.

His latest column, though, is now among my favorites since he succinctly explains the moral difference between markets and government.

In a free-market system, in order for one to get more for himself, he must serve his fellow man. This is precisely what Adam Smith, the father of economics, meant when he said in “An Inquiry Into the Nature and Causes of the Wealth of Nations” (1776): “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” …Free-market capitalism is relatively new in human history. Before the rise of capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man. Capitalism made it possible to become wealthy by serving one’s fellow man.

I’ve tried to make similar points, particularly in my post about government coercion vs. private charity. But Walter has a way with words.

I also like the way he closed his column. After explaining that big businesses often oppose capitalism, he then shows the similarity between tyrants and other statists.

Free-market capitalism has other enemies — mostly among the intellectual elite and political tyrants. These are people who believe that they have superior wisdom to the masses… Tyrants do not trust that people acting voluntarily will do what the tyrant thinks they should do. They want to replace the market with economic planning and regulation. The Wall Street occupiers and their media and political allies are not against the principle of crony capitalism, bailouts and government special privileges and intervention. They share the same hostility to free-market capitalism and peaceable voluntary exchange as tyrants. What they really want is congressional permission to share in the booty from looting their fellow man.

If you want to learn more about this remarkable economist, here’s a video about Walter’s life and here’s an interview about his latest book.

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My Iowa caucus predictions from yesterday were hopelessly wrong, probably because I was picking with my heart rather than my head. As I noted a couple of weeks ago, Mitt Romney’s openness to a value-added tax makes him a dangerously flawed candidate, and I hoped Iowa voters shared my concern.

In a column for today’s Wall Street Journal, I elaborated on those concerns, explaining why a VAT is bad fiscal policy. I had three main points. First, I noted that the big spenders need a VAT in order to achieve a European-sized welfare state in America.

… the left needs a VAT. It is the only realistic way to collect the huge amount of revenue that will be necessary to finance the mountainous benefits promised by our entitlement programs. Which is exactly what happened in Europe, where welfare-state policies only became feasible after VATs were adopted, beginning in the late 1960s.

Second, I explained that the left favors this giant tax on the middle class because they want more money and soak-the-rich taxes don’t generate much revenue.

First, there aren’t enough wealthy people to finance big government. According to IRS data from before the recession, when we had the most rich people with the most income, there were about 321,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That’s a lot of money, but it wouldn’t balance the budget even if the government confiscated every penny—and if it did, how much income do you suppose would be available in year two? Second, higher tax rates don’t raise as much revenue as expected. Upper-income individuals are far more likely to rely on interest, dividends and capital gains—and it is much easier to control the timing, level and composition of capital income, so as to avoid exposing it to the tax man.

Third, I debunked the foolish notion that a VAT creates a “level playing field” for American exporters.

…some manufacturers are willing to overlook the VAT’s flaws because the tax is “border adjusted.” This means that there is no VAT on exports, while the tax is imposed on imports. For mercantilists worried about trade deficits, this is a positive feature that they claim will put America on a “level playing field.” But that misunderstands how a VAT works. Under our current tax system, American goods sold in America don’t pay a VAT—but neither do German-produced goods or Japanese-produced goods that are sold in America because their VAT tax is rebated on exports. Meanwhile, any American-produced goods sold in Germany or Japan are hit by a VAT, as are all other goods. In other words, there already is a level playing field. To be sure, there will also be a level playing field if America adopts a VAT. But it won’t make any difference to international trade. All that will happen is that the politicians in Washington will get more money whenever any products are sold.

But I didn’t limit myself to economic analysis. I also warned that Mitt Romney might be an even greater threat on this issue than Barack Obama.

Unsurprisingly, President Obama is favorably inclined toward a VAT, having recently claimed that it is “something that has worked for other countries.” And yet it’s unlikely that the president would propose a VAT, in large part because he is fixated on class-warfare tax hikes. If he did, almost every Republican in Congress would be opposed, even if only for partisan reasons. But what if a VAT sympathizer like Mr. Romney wins next November and decides that his plan for a lower corporate tax rate is only possible if accompanied by a VAT? There will be quite a few Republicans who like that idea because they want to do something nice for their lobbyist friends in the business community. And there will be many Democrats drawn to the plan because they realize that they need this new source of revenue to enable bigger government. That’s a win-win deal for politicians and a terrible deal for taxpayers.

This point deserves some elaboration. Why is the VAT a do-or-die issue?

Simply stated, the United States is in grave danger of becoming a European-style welfare state. Indeed, that will automatically happen in the next few decades because of demographic changes and poorly designed entitlement programs.

This is why there is a desperate need to reform programs such as Medicare and Medicaid. But politicians almost certainly won’t adopt the needed reforms if they have the ability to instead confiscate more money from taxpayers – especially if they have a new tax like the VAT, which is a money machine for bigger government.

Ironically, it appears there’s more danger of that happening with Romney in the White House.

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