NOT THE WHOLE STORY
But the story does not end here. We need to follow the full cycle in order to understand what is happening and how taxes are further damaging. Let's see if we can do just that:
- People work and have profits.
- Part of those profits are stolen through taxation.
- State spends taxes.
- People have less profits thus they save less.
- Less savings implies less capital which implies less wellbeing.
From this perspective it is clear that the state has transformed capital into consumption. Instead of this capital being available to increase production, it is being used to buy stuff. In other words, in the first instance of this process capital is indeed gone in a puff of smoke.
This is correct, but this is only the first level of damage.
The second level of damage occurs when we take a look at what the state is purchasing with those taxes. As a state represents… well… something (allegedly citizens), some of the stuff it will purchase will satisfy citizen's needs but most of it will not. Why not? Because each of us has individual needs and the state is providing a solution to a problem that may or may not exist. There is no such thing as a customized tax spending process by any state. The state does not show up at your door and request your list of needs to be satisfied. They assume and assumption is the mother of all screw-ups.
What it means is that the state is biasing or skewing or twisting the normal operation of free markets. Merchants that receive purchase orders from the state believe those purchase orders represent actual needs for their goods or services and thus they expand. Merchants that do not receive purchase orders from the state believe that there is no real need for their goods or services and switch production to something the state may want because they believe there are real needs in such purchase orders.
In Austrian Economic terms this means that the "structure of the market" is being affected. This "structure" is simply the steps that companies take when attempting to modify their operations in the belief that in so doing they will satisfy more of people's needs. For example, they may hire more people or buy new machines or a acquire new facility and so on. Taxes distort market structure. Through this process, even more capital (i.e. savings) is wasted in modifying the structure of the market. Capital that could be used to satisfy actual needs.
See how taxes bend the free market forcing it into a direction that won't satisfy people's needs thus wasting valuable resources (i.e. capital)?
FOLLOW THE MONEY
But this is not it. Money taken from our pockets through taxation is being spent by governments. This money does not disappear but ends up in the hands of producers. These producers will now be in possession of the capital that was once ours. But their view as to how this capital can be invested is different from ours. They may choose to use part of this capital to expand, with deadly consequences. This is so because in so doing they become more and more dependent of that "purchase order" from the state and in so doing they are satisfying less and less of our needs. This is the origin of companies perpetually chasing "government contracts". This is so because they produce something nobody wants! Well… nobody except the government.
Or, these companies may choose to "invest" this capital differently than what we would want done (i.e. in order to satisfy our needs). Hence, they again alter the market structure because now capital becomes available for business producing goods and services which we would never want. More waste.
But those companies receiving this "investment" capital also have their views as to what to do with it. And their vision may be completely different from ours because it is tinted by the "investing" company whose views are tinted by those "purchase orders" coming from the state. As a matter of fact, chances are excellent that this will be the case because companies receiving this "capital injection" are becoming less dependent upon regular customers' purchases and more dependent from state purchases.
This is how we end up with gigantic manufacturing companies transforming themselves into "financial" entities. Or purchasing massive amounts of government bonds (which only worsens the situation by further altering the market structure). Or massive "injections" of capital into hedge funds. Or… or… or… you get the picture.
The issue is not that companies are acting irrationally, they are not. Companies are acting rationally within the new artificial parameters imposed by the government, which would not exist should the government would not be interfering with free markets. It is government action that interferes with the free market, not a free market failure.
EFFICIENCY AND INNOVATION, WHO NEEDS THEM?
Yet another side effect of taxation is that since many companies now operate to a large degree for the state, there is far less incentive to become efficient and innovate. How is this possible, even considering that some governments have so-called "bidding" contracts? Because the economic calculation that such companies perform (i.e. how much profit they can get away with) is different when your customer is the state than when your customer is…well… people. This is so because governments operate in vacuum and they are thus isolated from the free market. Basically, governments have no idea how much things cost in real life and in a real free markets. All governments know is how much budget they have. Thus, companies performing economic calculations will be looking at how much they can get away with the government, not in a free market. Furthermore, many of those companies are protected from competition by governments, which further artificially increases their profits (many government contracts have a monopoly clause).
PURE WASTE
All those processes are not even the worse of the lot. So far we have assumed that at least we get something out of the purchases that states do. But what happens when we don't get anything out of them? Then the first step of the cycle is pure waste. How could this be possible? Simple. Consider the following:
Defense budget? Waste!
Wars? Waste!
Propping-up banks to save them from bankruptcy? Waste!
Bureaucracy wages? Waste!
Pointless and useless government programs (you know what we are talking about). Waste!
Loans to prop the state? Waste!
Printing to prop the state? Waste!
The list is endless. The amount of money that governments waste, and we mean outright waste, is bottomless.
CONCLUSION
Taxes are evil because they decrease our wellbeing through a myriad of processes, all of them bad. The bottom line is simple. Once capital is stolen from our pockets two things are guaranteed to happen:
- There is going to be a significant waste of capital (thus our wellbeing will decrease)
- There is going to be a significant market structure deformation (thus our wellbeing will decrease).
In the end there really isn't any other option other than removing all taxes. But if this is the case, why do we need governments for? The answer is we don't. As we said time and time again, free markets are optimized systems. Any meddling with them only decreases their efficiency and in so doing this decreases our wellbeing.
Believe in reality or believe in socialist systems.
It's entirely your choice. Just one thing. If you believe in the latter, please include us out!
Note: please see the Glossary if you are unfamiliar with certain words.
