In the previous post, I argued that the burden of maintaining the entire public sector and ALL THOSE WHO SERVE THE AUTHORITY by providing the public goods and services needed to govern, is borne ONLY by providers of private goods and services. And to illustrate this, I used the image of Atlas carrying the globe, and the labels attached at the appropriate places in this image were to specify who is who. However, I made a mistake there (mea culpa) in omitting on the label for the public sector the AUTHORITY of local governments at all levels. I hereby correct this error by attaching a suitably modified illustration. I hope that there will now be no doubt as to who ATLAS represents in the illustration, and who it is that it is LETTING ON ITS SHOULDERS.
However, someone could raise the objection that the weakness of my proof is that I am relying on a model of a moneyless economy, which, to be fair, never existed in its pure form. After all, historical research shows that the first forms of money appeared more than three thousand years ago, while the very fact of the use of money and the emergence of a capitalist economy based on the division of labor and market exchange – according to mainstream economists – means that we are dealing with an economic model that is completely different from the natural economy. Thus, what may have been true of the natural economy is not, in their view, applicable to the modern market economy.
Therefore, it’s high time to explain how my thesis, which I uphold in its entirety, relates to the undeniable fact that the primary source of funding for all public sector expenditures is the TAXES paid IN MONEY, which are of a UNIVERSAL nature and are paid by EVERYONE, thus including those whom I have counted as providers of public goods and services?
Let me start by reminding you that the fact that money was introduced into the economy DID NOT CHANGE THE PURPOSE of people’s economic activity. This purpose has always been and still is the acquisition of, first of all, GOODS, and to a certain extent – also SERVICES to satisfy their life needs at an acceptable cost in a given circumstance. The introduction of money has also NOT CHANGED in any way the fact that everything the rulers need, both as people and as those in power, COMES FROM THE SUBJECTS of that power.
Nonetheless, the fact that the public sector BUYS the vast majority of the goods and services it needs has changed the WAY we view the role of the state in this aspect. In the non-monetary model, when public tributes were paid in kind, none of the suppliers of private goods obliged to provide them to the ruler WERE GIVEN ANYTHING in exchange. “Payment” (in kind) – as I presented previously – was given only to suppliers of public goods and services. Now, on the other hand, MONEY EQUIVALENT for goods and services provided to the state is received by both providers of public goods and services and providers of private goods and services. This, then, is the first area where one can see the difference between the old and modern economic models. In the modern economy, THE STATE BUYS AND THE STATE PAYS every contractor in the market. And this is why there is an IMPRESSION that the state (public sector) is the same market participant as the rest of the market, and that it treats all of its contractors in the same way.
The impression of equal treatment of all citizens by the modern state is further reinforced by the fact that a universal tax obligation has been introduced. This means that everyone is obliged to pay taxes except those who, for some reason, under certain provisions of the law, are exempted from this obligation. As a result, taxes are paid not only by those whom I refer to here as participants in the market for private goods and services, but also by all providers of public goods and services.
This fact of the public sector paying an EQUIVALENT amount for any goods and services it buys on the market, combined with the PRINCIPLE of UNIVARSALITY of the tax burden, creates the impression that – unlike in a natural economy – in a monetary market economy the costs of the sector’s operation are borne by all taxpayers in proportions based on the applicable tax law. In reality, however, nothing has changed in this regard.
To demonstrate this in a way that is reasonably clear to non-economists, yet convincing, I will use an example “from life”, which well captures the essence of the problem. For this, let’s look at the classic, until recently, model of the family, in which the husband and father WORKS to “earn money” while the wife and mother takes care of running the house. There is a well-known joke, I believe, that although the head of such a family is the husband, but this head is turned by the neck, that is, the wife. I will use this joke here, because it fully captures both the essence of the ECONOMIC RELATIONSHIPS prevailing in such a family and those prevailing in the social arrangement called the state. According to political philosophers, the SUVEREIGN IS THE PEOPLE IN DEMOCRACY. The problem, however, is that this people is SUBJECT TO THE STATE AUTHORITY, which, like a husband his wife, they freely choose for themselves. And should they oppose this authority, then – like the head of the family – they will be exemplarily punished by the “neck”, which has a whole range of effective ways to discipline the rebel. Thus, both in one case and in the other, open rebellion is rather rare. However, it is not the issue of possible rebellion that is at stake here, but the issue of the SAME ECONOMIC RELATIONSHIPS that prevail in both of these social arrangements, that is, both the state and the family.
The only source of income in the family model under consideration here is the husband’s economic activity, the PURPOSE of which is to earn INCOME FROM SELLING TO PERSONS OUTSIDE THE FAMILY either some goods or his own services. It makes no difference to the substance of the case what he does for a living. Nor does it matter how much of the income he earns he must give to his wife to support the family (by default, all of it). All that matters is that this portion of income is the only source of funding for purchases by the ruling “neck”. If we exclude any other sources of income for the wife, the amount taken over by her from her husband determines the maximum amount of expenses that can be financed by her. The problem of the source of state (public sector) income is exactly the same; it is the income of individual citizens earned from the sale to other citizens of their own PRIVATE GOODS AND SERVICES.
It is clear that the bulk of the expenditures made by the wife will be spent on “living”, i.e. on the purchase of PRIVATE GOODS AND SERVICES. However, there may be others, such as expenses for a domestic helper who will relieve her of some of her duties, allowing her to devote more time to herself and to “family life.” The employment of such help can be seen here as the equivalent of the purchase of PUBLIC GOODS AND SERVICES by the state (public sector). For both in the case of the family and in the case of the state, these are goods and services needed for the smooth operation of each of these arrangements, i.e. for governance.
It is worth noting in passing that I am not talking about WORKING FOR THE FAMILY, but about FINANCING THE COSTS OF PURCHASE. This is because it is obvious that in this family arrangement, the HUSBAND WORKS FOR INCOME in order to be able to buy market goods and services, while the WIFE WORKS NOT FOR INCOME, managing the whole arrangement in order to meet those needs of the family that do not require expenses or that cannot be met by goods and services bought on the market. Such a division of roles does not exist in the state, of course, and therefore this analogy is not entirely apt. Nevertheless, it nevertheless captures well the essence of the problem considered here.
So far, there is no doubt that both the wife’s “living” expenses (private goods and services) and the expenses of domestic help (public goods and services) are financed in such a family from the income of its “head,” i.e. the husband. This “head” thus bears the entire COSTS of financing the expenses of the entire family. Thus, if the labels in the illustration attached above were to be changed slightly, we would have a clear picture of the relations prevailing in the family under consideration here. The atlas would then be the “head” of the family, and the globe carried by him could symbolize the wife, who, for more efficient management of the entire family, uses the services of domestic help to some extent.
And here we come to the crux of the problem under consideration, that is, the matter of proof of the thesis posed in the previous post that the costs of maintaining the entire apparatus of government and all who serve it are borne solely by participants in the production and exchange of private goods and services. Leaving aside all other issues, it is worth considering what the ECONOMIC effects would be in this family arrangement if, in addition to the “tax” levied by the wife on her husband’s income for the family’s living expenses, the wife would also “tax” the income earned by the person providing domestic help services. Would such a “tax” (leaving aside, of course, the question of its legality and the absurdity of such a situation) increase the disposable income of this wife by even a penny? Would it cause a reduction in the burden of the husband’s FINANCIAL costs of supporting the family? It is clear that the funds from such a “tax” the wife could spend for any purpose. This, however, would not change in any way the fact that ALL EXPENSES ARE FINANCED IN THIS FAMILY FROM THE HUSBAND’S INCOME.
And exactly the same ECONOMIC EFFECT – keeping all proportions in mind – is the taxation by the state on the INCOME of the providers of public goods and services. The taxes paid by them are the amounts that are first included in the price paid by the public sector for public goods and services provided to it, to return there later in the form of various taxes due. Thus, in economic terms, they flow “idle” in both directions, not increasing by a penny the TOTAL REVENUE of the PUBLIC SECTOR as a whole, i.e. the state and local government sectors combined. Nor do they in any way change the fact that the TOTAL EXPENDITURE OF THE PUBLIC SECTOR IS FINANCED BY SUPPLIERS of PRIVATE GOODS AND SERVICES. And since part of this spending is for the PURCHASE OF PUBLIC GOODS AND SERVICES, so I consider as proven the thesis that
THE ENTIRE PUBLIC SECTOR AND THE SECTOR OF PRODUCTION OF PUBLIC GOODS AND SERVICES IS MAINTAINED BY THE INCOME OF THE SECTOR OF PRODUCTION AND SALE OF PRIVATE GOODS AND SERVICES.
To answer the question of why, then, universal tax obligation serves, if only taxes paid by the SECTOR of PRIVATE GOODS AND SERVICES PRODUCTION have ECONOMIC SENSE, and to many other resulting problems will be devoted next posts.
Source of original image:: MAN_Atlante_fronte_1040572.JPG (2112×2816) (wikimedia.org)
