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False Profit

Mises Daily: Tuesday, July 25, 2000 by

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Henry Payne, The Detroit News

As the political silly season moves into high gear with the political conventions scheduled for next month, the candidates have been bombarding us with promises for new "free" government programs.

Do we want lower prescription drug prices for senior citizens? The federal budget surplus will pay for this giveaway. Do we want more policemen to help fight crime? The "surplus" will supply the cash. Do we wish to "fix" Social Security? The "surplus" comes to the rescue.

All in all, Congress and the presidential candidates have been inundating voters with new and creative ways to spend this potentially burgeoning surplus – and there seems to be no end to the line of new takers. (Remember that the "surpluses" are actually projections by the government.) After all, people seem to reason, we can have all of these new free goodies and we don’t even have to raise taxes!

Pardon me for interrupting this Roman feast, but there is another, more accurate way to examine this "surplus," one that will not please the authorities. Do not think of this federal budget surplus as a new cornucopia, a repeal of the Law of Scarcity, or something that resembles a "profit" earned by business firms. Rather, let us think of this relatively new financial phenomenon as the result of fraud committed by the political classes upon taxpayers.

Politicians are fond of alleging "overcharges" committed by private businesses. Oil companies are "overcharging" for gasoline and other oil-related products; insurance companies "overcharge" customers for premiums; pharmaceutical firms routinely "overcharge" for prescription drugs, and the airlines have been engaging in "overcharges" ever since the early days of deregulation.

If the political classes and their media allies can refer to free market prices as "overcharges" then perhaps we need to apply their language to the products that they produce in Washington, D.C. Simply put, the budget "surpluses" are not surpluses at all; they are pure and simple overcharges of taxes. Furthermore, they are true overcharges, as opposed to the bogus overcharges allegedly committed by private, profit-seeking business firms.

First, let us examine just what is happening regarding federal spending and taxation. Each year, Congress and the President of the United States ultimately agree on a budget for the central government. The budget includes what is to be spent, the revenues "needed" to meet spending goals, and how the government will collect the taxes.

That some politicians will liken the projected surpluses to profits demonstrates their dishonesty. Firms that make profits do so because they have pleased customers to sell enough products and services to earn revenue that enables the firm’s owners to have something left over after paying their costs. As Murray Rothbard has written, firms earn profits because they are able to keep costs low enough to earn a differential between those costs and the market price of their products. That is decidedly not how the government does business.

The vast amount of services rendered by government goes to people who pay relatively little in taxes. (See previous Mises.Org articles on the increased progressivity of the U.S. tax code.) On the other hand, a relatively small number of people pay most of the taxes, yet are not eligible for most of these "benefits."

For example, my wife and myself and another couple with whom we are friends adopted children from Guatemala this past year. I am a college professor and he is a dermatologist. My income is low enough for us to be eligible for a $5,000 adoption tax credit; my friend’s income is considerably higher than mine, which means that he and his wife will receive no tax credit at all, thanks to tax laws.

In fact, the couple paid nearly $100,000 in federal and state taxes last year, but the political classes declare that they are "not deserving" of any tax breaks. As Norman Van Cott of Ball State University has so aptly put it, the current tax policy is nothing less than a national disgrace.

Others argue that the surplus is not an overpayment of taxes and that cutting tax rates or eliminating certain taxes altogether, such as the levies on inherited wealth, would be unfair to "working people." This is an interesting take on the word "unfair," and exposes the dangerous mindset of the political classes and their media allies.

If they argue that taxes just are payments for services provided by the government, then they should be willing to apply such policies to private businesses as well. For example, the next time Bill Clinton visits Macdonald's, maybe he can pay the cashier, but not be eligible to receive food. Instead, someone else will receive the food. It would be interesting to see the reaction of the editor of the New York Times if he were to receive the same treatment when he dines out at an expensive restaurant.

Furthermore, to use the left’s own logic, if surpluses are not overcharges, then the huge budget deficits the government ran over the last few decades were not the result of taxes being too low. Yet, that is precisely what politicians were arguing at the time. Many of those same politicians today are refusing to apply the same standards to budget surpluses. Reducing taxes, they proclaim, is "risky" because the government will be deprived of revenue that it "needs."

When Clinton recently vowed to veto a bill that reduces the tax burden for some married couples, the president declared that the surplus is needed to shore up the Social Security System and to "pay down the national debt." On the first issue, it is enough to say that Social Security is a fraud and has been thoroughly examined on these pages.

As for using the projected "surpluses" to reduce or eliminate the trillions of dollars of U.S. indebtedness, we are being snookered. If Clinton and others in Congress actually intended to quickly pay down the government debt, then they simply can earmark the extra tax revenues for that purpose. Instead, we are "given" new programs upon programs, all of which are a farce and certainly are not needed to promote a good society.

In short, the current budget surpluses are not the government's version of a profit. Profits are earned in the business world by keeping costs down and giving customers what they want.

Government earns surpluses by seizing property from citizens, and then not permitting those same citizens to use those services that they are financing. Business owners who engage in such practices are prosecuted for theft and fraud. Come to think of it, that might be the right thing to do to our politicians as well.

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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at North Greenville College. Send him MAIL.