FT139: “The political debate has evolved from no taxation without representation to representation without taxation.” —Old Pithy

Posted by PITHOCRATES - October 12th, 2012

Fundamental Truth

Because the Romans debased their Silver Coin they Required the People to Pay their Taxes in Gold or in Kind

High government spending caused the fall of the Roman Empire.  When the Roman Empire no longer expanded through military conquest it could no longer use the spoils of war to pay for the cost of empire.  Which presented some fiscal problems.  As the empire was never bigger.  Covering most of the civilized world.  Which they needed to protect with a vast army.  And governed through a vast bureaucracy.  Both of which cost lots of money.  Lots and lots of money.

So how did they replace the spoils of war?  Taxes, of course.  Starting small.  And growing lager.  To pay for the cost of the expanding state.  Government bureaucrats.  City improvements.  Food for the poor.  Food for the army.  And, of course, the mighty Roman legions.  Later, as citizens avoided serving in the Roman legions, the Romans turned to hired mercenaries to guard the frontier.  And the problem with sprawling empires?  They have very long borders to protect.  And that ain’t cheap.

To help pay for all of this the Romans turned to some bad monetary policy.  In addition to taxation.  Because their tax revenue just wasn’t enough.  So they started debasing their silver coins.  Putting more and more lead into the coins.  And less and less silver.  But this caused another problem.  Inflation.  As the currency became worth less it took more of it to buy anything.  So prices rose.  Making the silver coin pretty much worthless for taxes.  So the Romans required that people to pay their taxes in gold.  Or in kind.  If you grew wheat you gave a percentage of your harvest to the state.  If you made shoes you gave a percentage of all the shoes you manufactured to the state.

A King ruled over the Landed Aristocracy who Lived the Good Life as long as they were Loyal to their King and paid their Taxes

As the tax burden grew small business declined.  Small farmers and manufacturers said enough was enough.  They were working more for the state than for themselves.  So they quit their businesses and worked for someone else.  Because it was easier.  But this caused another problem for the Romans.  No one was making the stuff the Roman Empire needed anymore.  Food and manufactured goods were becoming scarce.  Which made it difficult to maintain their armies on the frontier.  And to provide the massive welfare state in the cities.  So the Romans addressed this problem with new laws.

If you didn’t like working your farm or your business and giving all the proceeds to the state, tough.  You no longer had a choice.  And neither did your children.  If you made shoes you were going to continue to make shoes.  And when you no longer could make shoes your children would continue in the trade.  Those working on farms became attached to the land.  And could never leave.  Regardless of who owned the farm.  If you farmed you would forever farm.  As would your children born on that land.  Allowing the landowners to raise their crops.  And pay their taxes.

So this led to a few rich landowners.  And impoverished masses working the land.  Sound familiar?  This would evolve into European feudalism.  Medieval manors.  The landed aristocracy (the few).  Peasantry (the many).  And, of course, kings (the one).  The basis of medieval governance.  Lasting thousands of years.  Where a king would rise to rule over the landed aristocracy.  Who he allowed to live the good life as long as they were loyal to their king.  And paid their taxes.  The nobility received certain privileges for this arrangement.  While the peasantry considered themselves lucky if they didn’t die from hunger.  And everyone lived happily ever after.  If you were lucky enough to be the one.  Or the few.

Representation without Taxation allows Government to Spend as Irresponsibly as They Please

Up until the 1200s a lot of France belonged to England.  Or, rather, the English nobility.  The barons.  But King John changed all of that.  For he liked to do what kings are wont to do.  Conquer.  And he tried to conquer a lot.  Only he wasn’t very good at it.  He blew a lot of the nobility’s taxes on failed adventures.  And lost a large chunk of France in the process.  So the taxpayers, the ones bearing the brunt of the king’s follies, reigned in King John’s powers.  The barons made John place his great seal on Magna Carta at Runnymede in 1215.  Which didn’t do a whole lot at the time.  But it ushered in the era of representative government.  And taxation only with representation.

England would become a constitutional monarchy with Parliament to limit the power of the king.  To sit in Parliament you had to have skin in the game.  That is, you had to be a taxpayer.  For this was taxation with representation.  Where those paying the taxes had a say in how the government spent those taxes.  And only those who paid the taxes.  To keep governments from irresponsibly spending those taxes.  A new system of governance that changed the world.  One that once people experienced they demanded for themselves.  As the American colonists demanded.  When Great Britain wanted to tax the Americans even though they had no say in how the British government spent that money.  Something very un-English.  And something that would become very un-American (which led to American independence).

For awhile, at least.  For soon governments found a way to return to their dictatorial ways.  By getting around that annoying taxation only with representation.  Which governments found insulting to their privileged status.  For it galled them that they had to let these taxpayers limit their powers.  But what choice did they have?  Governments must take money from others to establish their nobility.  As it was no longer their divine right to take what they wanted.  Thanks to those barons in 1215.  And Magna Carta.  Which opened the sluice gates to a lot of limitations on absolute power.  But two can play at that game they found.

Their answer?  Representation without taxation.  Allow people to vote who have no skin in the game.  To help the government take what they want.  And to spend it as they wish.  By simply giving those who don’t pay taxes government benefits.  Who will always vote for those who promise to give them more government benefits.  And if you get enough people on these government benefits you can overcome any limitations the taxpayers try to enforce on you.  Currently in the U.S about half of the population pays no income taxes.  While the top 10% of all earners pay approximately 70% of all federal income taxes.  So you have approximately 50% of the population who pay no taxes voting on tax policy for the 10% who pay most of the taxes.  Allowing government to spend as irresponsibly as they please.  Like in pre-Magna Carta days.  Thanks to representation without taxation.

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Classical Greece, Persian Empire, Hellenistic Period, Roman Empire, Italian Renaissance, Venice, Florence and Government Bonds

Posted by PITHOCRATES - January 17th, 2012

History 101

The High Cost of Mercenary Soldiers and a Bloated Bureaucracy brought down the Western Roman Empire

Classical Greece dates back to the 5th century BC.  Lasted about 200 years.  And was the seed for Western Civilization.  Classical Greece was a collection of Greek city-states.  There was no Greek nation-state like the nation of Greece today.  The city-states were independent.  And often waged war against each other.  Especially Sparta and Athens.  Athens is where we see the beginnings of Western Civilization.  Sparta was a city-state of warriors.  While Athens kicked off science, math and democracy, Sparta bred warriors.  And boys trained from an early age.  Or were abandoned to die in the wilderness.

Adjacent to Classical Greece was the great Achaemenid Empire.  The First Persian Empire.  The empire of Cyrus the Great.  Which extended from the eastern Mediterranean all the way to India.  Some of those Greek city-states were on the eastern coast of the Mediterranean.  Did not like Persian rule.  And the Ionians revolted.  Supported by Athens.  The Ionian Revolt (499 BC) was the first in a series of Greco-Persian Wars.  Persia’s Darius the Great was tiring of the Greek’s insolence.  And set out to conquer the Greek mainland.  Only to get turned back at the Battle of Marathon.  His son Xerxes returned to Greece to complete the work his dad started.  King Leonidas of Sparta delayed him at the Battle of Thermopylae for three days.  But he defeated the vastly outnumbered Spartans and marched on to Athens.  Where he sacked the abandoned city.  But he would lose the subsequent Battle of Salamis naval engagement.  Losing his navy.  Forcing Xerxes to retreat.

The Greek city-states united to fight their common enemy.  And won.  With the common enemy defeated, Sparta and Athens returned to fighting each other.  In the Peloponnesian War.  Where Sparta emerged the dominant power.  But the constant fighting weakened and impoverished the region.  Making it ripe for conquest.  And that’s exactly what Phillip of Macedon did.  He conquered the great Greek city-states.  And Phillip’s son, Alexander the Great, succeeded his father and went on to conquer the Persian Empire.  Creating the great Hellenistic Period.  Where the known world became Greek.  Then Alexander died.  And his empire broke up.  Then the Romans rose and pretty much conquered everyone.  And the known world became Romanized.  Built upon a Greek foundation.  Until the western part of that empire fell in 476 AD.  Due in large part to the high cost of mercenary soldiers.  And a bloated bureaucracy.  That was so costly the Romans began to debase their silver coin with lead.  To inflate their currency to help them pay their staggering bills.

In Exchange for these Forced Loans the City-States Promised to Pay Interest

The history of the world is a history of its wars.  People fought to conquer new territory so they could bring riches back to their capital.  Or to defend against someone trying to conquer their territory.  And take their riches.  Taking riches through conquest proved to be a reliable system of public finance.  For the spoils of war financed many a growing empire.  It financed the Roman Empire.  And when they stopped pushing out their borders they lost a huge source of revenue.  Which is when they turned to other means of financing.  Higher taxes.  And inflation.  Which didn’t end well for them.

With the collapse of the Western Roman Empire the world took a step backwards.  And Europe went through the Dark Ages.  To subsistence farming on small manors.  The age of feudalism.  Serfs.  Wealthy landowners.  And, of course, war.  As the Dark Ages drew to a close something happened in Italy.  At the end of the 13th century.  The Italian Renaissance.  And the rise of independent Italian city-states.  Florence.  Siena.  Venice.  Genoa.  Pisa.  Much like the Greek city-states, these Italian city-states were in a state of near constant war with each other.  Expensive wars.  That they farmed out to mercenaries.  To expand their territory.  And, of course, to collect the resulting spoils of war.  These constant wars cost a pretty penny, though.  And built mountains of debt.  Which they turned to an ingenious way of financing.

These Italian city-states could not pay for these wars with taxes alone.  For the cost of these wars was greater than their tax revenue.  Leading to some very large deficits.  Which they financed in a new way.  They forced wealthy people to loan them money.  In exchange for these loans these city-states promised to pay interest.

Renaissance Italy gave us Government Bonds and a new way for a State to Live Beyond its Means

The vehicle they used for these forced loans was the government bond.  Used first by the Italian city-states of Venice and Florence.  Which were very similar to today’s government bonds.  Other than the being forced to buy them part.  The bond had a face value.  An interest payment.  And the bondholders could then buy and sell them on a secondary market.   The market set interest rates then as they do now.  The market determined the likelihood of the city-state being able to pay the interest.  And whether they would be able to redeem their bonds.

When there was excessive outstanding debt and/or war threatening a city-state’s ability to service their debt interest rates rose.  And the face value of existing bonds fell.  Because if the state fell these bonds would become worthless.  When state coffers were full and peace rang out interest rates fell.  And bond prices rose.  Because with a stable state their existing bonds would still be good.  Just like today.  So if you’re into government bonds you can thank Renaissance Italy.  And their wars.  Which gave birth to a whole new way for a state to live beyond its means.

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FUNDAMENTAL TRUTH #54: “Every dollar the government spends is a dollar that the consumer can’t spend.” -Old Pithy

Posted by PITHOCRATES - February 22nd, 2011

An Increase in Economic Activity Creates Jobs

Economic activity in a free market is win-win.  A buyer and seller come together.  They each have something the other wants.  One has a product or service.  The other has money.  Each values more what the other has.  So they trade.  And each feels they are better off after the trade.

Millions of such trades make up the economy as a whole.  And this goes on all by itself.  No one manages it.  No one steps into each trade to make sure it’s fair.  There’s no need.  If it’s not a fair trade one of the parties simply won’t trade.  They’ll go elsewhere to find a better deal.

As more people come together to make trades economic activity increases.  This activity creates more jobs (to meet growing demand).  Giving people more money.  So they can go out and make more trades.  Further increasing economic activity.

High Taxes and Government Spending Fell the Roman Empire

Many things made the Roman Empire a great empire.  Among these was the aqueduct.  And the Roman legions.  Fresh water allowed cities to grow.  And the army protected the cities from its enemies in other civilizations.   And the raiding barbarians beyond civilization.  But water and the army were costly, though.  It took a lot of money.  A lot of which came from the spoils of war.  And when the empire was expanding and there were always new lands to conquer there were always spoils to send back to Rome. 

But eventually the Romans saw their borders fixed.  And there was peace.  The Pax Romana (Roman Peace).  The problem with peace, though, is that you’re not waging war.  And when you’re not waging war you’re not sending home any spoils of war.  But the empire still had bills to pay.  Aqueducts to build.  And soldiers to pay.  So the Romans had to turn to other funding sources.  The citizens.  Taxes replaced spoils.

And the taxing and spending began.  The state grew.  The army grew.  And the government grew.  All required more and more taxes.  Then they debased the coinage (i.e., inflated the money supply by using less precious metal in each coin so they could make more coins out of the same amount of precious metal).  Silver coins contained more and more lead.  And were worth less and less.  Eventually Rome wouldn’t accept tax payments in silver coin.  You had to pay with gold.  Or taxes in kind (a wheat farmer gave a portion of his wheat to satisfy his tax obligation).  This got so bad that farmers quit being farmers because they couldn’t make any money with so much of their crops going to Rome to pay their taxes.  Then Rome passed laws preventing farmers from quitting farming.  The Roman citizen became an unhappy citizen.  Few wanted to serve in the Roman legions.  So Rome had to hire soldiers.  Which cost more money.  And on and on it went until tax and spend became tax and spent.  The empire spent itself into collapse.

The Key to Economic Activity is Private Sector Jobs

Every time taxes went up the Roman citizen had to pay more of his silver coins in taxes which left him with less to spend on his family.  When Rome debased their silver coins the Roman citizen’s money was worth less and bought less.  When more of a farmer’s crops went to Rome to satisfy their tax obligation they had less to sell at market.  Every time the government spent more the private sector spent less.  Because Rome transferred more of the private sector wealth to the public sector.

When the government takes more money out of the private sector, the private sector has less money to spend.  That means people are spending less when they go to the store.  Which means the store is selling less.  And when a store sells less they buy less.  And when they buy less manufacturers produce less.  So manufacturers cut back on production.  Lay people off.  Which means these people have less money to spend in stores.  So sales at stores decline further.  So stores buy less.  And manufacturers produce less.  Cut back on production.  Lay off people.  Who have less to spend.  And round and round it goes until the economy crashes into a recession.

The key to economic activity, then, is jobs.  We need jobs to get the money we need to make trades with other people.  If we don’t have a job we have no money.  And can’t trade for anything.  So we need jobs.  And who creates jobs?  Businesses.  And how do they do that?  By selling something.  The more they sell the more jobs they create.  The less they sell the fewer jobs they create.  And what helps them sell more?  Lower taxes.  What prevents them from selling more?  Higher taxes.  For the more money in the private sector the more money the private sector can spend.  And the more people can trade with each other.  Which increases economic activity.  Which creates more jobs.  Giving more people money to trade with other people.  And round and round it goes.  Until we all live happily ever after. 

An Economy Works Best when Government Intervenes Least

John Maynard Keynes was an economist that said that government could stimulate the economy by spending money during a recession.  Governments love this man.  Because it’s like a license to spend.  Never mind that it never worked.

Here’s why.  The government doesn’t earn any money.  They have to take it from someone else before they can spend it.  That’s like me giving you $20 out of my wallet so you can stimulate the economy.  And how much will you stimulate the economy by spending my $20?  Will it be more than if I spent that $20 myself?  No.  Because, in the end, someone is spending only $20.  Either you.  Or me.  The net spending doesn’t change.  Only who’s spending it.

This is the fundamental flaw in Keynesian economics.  Tax money comes from taxpayers.  Who work.  Stimulus spending only transfers the money to someone else to spend.  Leaving the taxpayer with less to spend.  Either now through higher taxes.  Or later through higher taxes to pay for past deficit spending.  Which is a very common feature of Keynesian economics.  Deficit spending.  And huge debts created by all that deficit spending.

Contrary to Keynes, an economy works best when government intervenes least.  This keeps the money in the private sector where it belongs.  Where it does what it does best.  Create jobs.

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