Sales and Income Taxes

Government spending

Suppose the government takes $100 million to build a bridge. This takes up scare labor and materials from the market, which could have been used elsewhere. But the Disneyland owners could do the exact same; so what’s the difference between government spending and private entrepreneurs spending? Feedback. The entrepreneurs will know whether or not the project was profitable, while the government won’t, because it operates (at least partially) outside of the market. The government buys its resources from private owners, its budget provides a limit to how many resources it siphons out of the private sector; in pure socialism, all resources are subject to the political rulers.

However, because the government is not a business, it doesn’t raise its funds voluntarily from the consumers of its services. Therefore, even though the authorities in an interventionist economy understand the relative importance of the resources they are using up, they still don’t have any objective measure of how much their citizens benefit from these expenditures. Thus even if the authorities only want to help their people, they are flying blind.

Another example could be a library. Suppose the government builds a library for $400,000 with free access to books and internet. Even though we might find nothing corrupt or shocking, the questions still remains: was it worth $400,000? The crucial point is that we know one thing for certain: no entrepreneur thought that he could earn enough revenues from charging for book to make such an enterprise worthwhile. We know this, because the library didn’t exist until the government used its own funds to build it.

Even if we would ignore this problem, there is another question: is it better to spend the $400,000 on a public library, or would it do more good if used to buy free flu shots for every child under the poverty line? In cases such as this, the government in essence is a giant distributor of charitable donations. Even those citizens who welcome the concept should ask themselves: why not decentralize the decisions and allow each person to donate his or her funds to the various charities that seem most worthy?

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