Study Guide to Man, Economy, and State with Power and Market

Chapter 12: The Economics of Violent Intervention in the Market 159
7. Binary Intervention: The Government Budget
When analyzing the effects of government taxation and
spending, we need to use both a partial and general equilibrium
approach (p. 910); a tax will (a) make the taxed item less attractive
and (b) make the consumers poorer and so affect other markets
too. Both taxation and government spending distort the
economy; the former drains resources away from the private
sector while the latter distorts resource allocation away from
what it otherwise would have been.
8. Binary Intervention: Taxation
A. Income Taxation
Taxation penalizes production; it shifts resources
from taxpayers to tax-consumers. Just as a parasite must
take care not to kill its host, there is an upper limit on
taxation. Even if formally neutral with regard to consumption
and saving, the income tax tends to raise time
preferences by reducing everyone’s level of (lifetime)
income.
B. Attempts at Neutral Taxation
Rothbard defines a neutral tax as “a tax which would
affect the income pattern, and all other aspects of the
economy, in the same way as if the tax were really a freemarket
price.” There can be no such thing, because taxation
is coercive and thus differs fundamentally from a
voluntary price. A so-called flat tax is not the equivalent
of a price, because in the market rich customers do not
pay in proportion to their income. A head tax would be
better (in this respect), but it too is coercive; some taxpayers
would be forced to fund certain government activities
that they abhor.