When I was in University, I vividly remember one of my economics professors telling students to always remember the people involved when analyzing a policy change. I was reminded of this sage advice upon reading Matthew McCaffery’s Mises Daily article titled, “Who will pay for it?” is the wrong question to ask politicians. McCaffery’s point is the question often focuses too much on the question of who and how to pay which distracts from more important issues such as what is being paid for? I would add to that, who is being paid? By emphasizing the basic problem of finding the money, what is sometimes overlooked is the problem of whether new government programs will actually work of whether they will be wasteful and counterproductive, and who the tax consumers are.
Asking questions such as “who will pay for it?” and “what, specifically, is being paid for?” are particularly pertinent given the federal budget is to be unveiled today. Early reports suggest cumulative budget deficits over the next two years will be well above $50 billion (about 1.3% of GDP). The question, “who will pay for it?” is answered quickly as the federal government has only three sources of revenue: current taxpayers, future taxpayers and increasing the money supply (inflation) by selling bonds to the Bank of Canada.
The consequences of higher taxes and more inflation doesn’t seem to faze many people, including some well-known economists in Canada. Doug Bandow observed that left-wing activists tend to favor corporate taxation. They imagine a society divided between businesses and people. However, firms are owned by people, employ people, sell to people, and contract with people. Taxing companies means taxing people.
Increasing progressive income taxes, particularly on the rich, also misses the mark. Higher income tax skims off precisely the funds most likely to go into new investment — into building the new tools and equipment that increase the productivity and the living standards of workers. Higher income taxes slow down the rate of economic progress. The effort to soak the present rich implies soaking the future poor.
Every tax and transfer scheme inexorably creates two groups of individuals in regard to government: the taxpayers and the tax consumers. Here is how John Calhoun (1848) characterized the situation in his Disquisition on Government:
“The necessary result … is to divide the community into two great classes: one consisting of those who, in reality, pay the taxes and, of course, bear exclusively the burden of supporting the government; and the other, of those who are recipients of their proceeds through disbursements, who are, in fact, supported by the government; or in fewer words, to divide into taxpayers and tax-consumers. … The effect … is to enrich; and strengthen the one, and impoverish and weaken the other.”
Thus the answer to, “who is paying for it?” following my professor’s advice the people involved are current and future net taxpayers and holders of Canadian currency. There is no and there cannot be a “stimulation of the economy” by legally expropriating one group of Canadians and transferring those resources to a second group. Winston Churchills’s line still holds true, “a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
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