Economic Sophisms

Plunder Through Taxation

Bastiat Economic Thought

Plunder Through Taxation

When the rich lose weight, the poor die.

This quote, attributed to Lao-Tzu, describes the inevitable consequence of a taxation system that aims to tax the rich more heavily than others.

Yet, have you ever heard it said:

Taxation is the best investment: it's a fertilizing dew! See how many families it supports, and follow, in thought, its ricochets on industry: it's infinite, it's life.

In France, where public spending is considered a benefit, taxes are higher than in other countries. But Bastiat warns us right away: "In every public expenditure, behind the apparent good there is a more difficult to discern evil."

What is it about?

The economy refers to the positive or negative effects of political decisions on our lives. However, according to Bastiat, the economist must be attentive not only to their short-term effects on a particular group but also to their long-term consequences for society as a whole.

What we see is the labor and profit allowed by social contribution. What we do not see are the works that would be generated by this same contribution if it were left to the taxpayers. F.Bastiat

From the outset, he refutes the still prevalent argument that public spending funded by taxes creates jobs. Indeed, taxes create nothing since what is spent by the state is no longer spent by taxpayers.

Moreover, the state is more wasteful than individuals. Indeed, he reminds us, the state owns nothing; it produces no wealth. Public spending is often a source of waste because the immense sums confiscated from individuals often escape the responsibility of their owners and are spent in their stead by bureaucrats, who are subject to pressure groups.

Of course, as payment for an equivalent public service received in exchange, taxation is entirely defensible. But in France, the state has assigned several roles to taxes.

Initially, it was supposed to cover common expenses. Then, taxes were also given a role in regulating the economy. In this case, politicians and bureaucrats have power that is only limited by their goodwill. Engrossed in their artificial constructs, they shape the economy by taxing and regulating sectors more or less according to their whims to favor or disfavor them.

Finally, a social role was assigned to taxes. They were made an instrument of social justice. Thus, taxes should not affect everyone equally. Taxes must be redistributive, from those "who have more" to those "who have less."

The problem is that taxes, as conceived, are subject to the arbitrary power of those in authority. They favor or disfavor certain social categories depending on whether the power expects votes from them or not. Moreover, progressive rates yield little to the public treasury. However, they allow the majority to expropriate a minority and naturally become confiscatory.

That's why Bastiat had already understood the Laffer curve. Arthur Laffer is an American economist known for his famous "curve" (an ellipse), published in 1974, which shows that the yield from taxes increases with the lowering of the tax rate. This is the theory of diminishing returns due to excessive taxation.

Too much tax kills the tax. Arthur Laffer

Politicians naively assume there is an automatic and fixed relationship between tax rates and tax revenues. They think they can double tax revenues by doubling the tax rate. According to Laffer, such an approach overlooks the fact that taxpayers may change their behavior in response to new incentives.

The Laffer curve indicates that the government collects no revenue when tax rates reach 100%. Conversely, any reduction in taxes serves to stimulate economic activity and thus state revenues. Indeed, reducing marginal tax rates stimulates investment, work, and creativity, thereby promoting economic growth. A sufficient reduction could generate enough economic stimulus to significantly broaden the tax base and increase public revenues.

Bastiat might add that as much importance should be placed on reducing state expenditures as on reducing taxes. Nonetheless, as Margaret Thatcher, a disciple of Frédéric Bastiat, so aptly put it:

The goal is not to make the rich poor, but to make the poor rich.

And she said this while addressing socialists.

Quiz

eco2034.3

1/5

What main problem does Bastiat see in using taxes to reduce inequalities?