Spencer Heath Archive

Item 854

Random taping by Spencer MacCallum from conversation with Heath

December 1955

On this principle, it would appear that no matter where a tax falls, upon whom or upon what trade, profession or business it falls, that by the process of the market, the thing will be smoothed out, and each portion will suffer in proportion to the market value of what his contribution at that time is, a little time allowance being necessary of course for the matter to adjust itself, precisely the same thing as would happen if there were a number of pools of water connected by sluices and were all at one level, and if water would be dipped out of one, a little time would be required before they would all come back to the same level.

However, there are certain taxes that pyramid. A tax that is laid upon, let us say for a common illustration, upon an imported commodity. That tax makes the commodity more costly than it otherwise would be and raises the cost of all other commodities similar to it, because these other commodities similar to it do not have the competition of this imported article, so this commodity is made artificially scarce instead of being made naturally plentiful by the importation. Now as this commodity passes through the market, it costs each handler the original cost plus the tariff tax and plus the compensation to the first handler for his part in getting it ready for the market — preparing it, dividing it or subdividing it or packaging it or whatever is necessary, or merely warehousing it — as it passes from point to point. It becomes subject to taxation at each one of these points of exchange, and the tax accumulates so that the last dealer who buys it has to base his calculations on not only the original cost plus the cost of each person’s contributions of service to the commodity, which he would have to do in any case, but also the pyramiding of the tax, which becomes an overhead expense alongside of the natural expenses. So that by the time it reaches the consumer, he has to pay not only all of the services that have been applied to the commodity, but he has to pay for all the taxes — and he has to pay overhead on all the different persons’ taxes that had to be invested in the thing, the tied-up capital. So it made capital available for productive purposes less abundant.

Now if that tax had been applied only at the point of last sale, at the point where something is passing out of the market into the hands of a consumer, then it could only have been applied once, and it could not have been pyramided. So my own belief is the most harmful tax is the tax that is laid at some point in the course of exchange which is most remote from going out of the market, and the least harmful tax is the one which is laid at the point where something is just passing out of the market. Because in the one case the tax accumulates, or pyramids, whereas in the other case it is paid flat and has no further effect upon the market.

I am not an apologist for any kind of force or compulsion or coercion, taxation or any other, but there are degrees of tyranny, there are degrees of evil, and I am inclined to think that among the evils of taxation, the lesser evil is the tax that falls on services and commodities as they are issuing from the market rather than one that falls upon goods and services cumulatively as they pass from hand to hand in the course of exchange.

If we had taken something more simple like the person who produces food out of the ground, and food is taxed, then the food becomes scarcer and therefore it will take more clothing to trade for the same food than it would. So the clothing producer has to bear the tax along with the food producer. Suppose there were only two things required in a community, food and clothing, and taxes fell altogether on the food producer. Then that means there would be less food in the market in proportion to clothes. So it would take more clothes to trade for a given quantity of food than it would food to trade for clothes. Conversely, if the food producers had a boom, a bumper crop and so on, or some new technology produced of creating more food than heretofore, then it would make food so much more abundant that it would take more of that food to buy a given amount of clothing than it did before.

Now if an item of food is taxed in the hands of its first producer, in its raw state, then the distributor, let us say, jobber, or warehouseman or someone who takes it next and adds his services to it, will handle less of it at a higher price. He will pay more for less of it. And the next handler to whom it goes … I should think of some real illustrations, more literal, more illustrative than this, some particular thing that goes through a number of known processes. Well, we’ll say it’s corn. The miller has to pay the farmer a higher price for less corn because some of the corn has been taken out of the market. So the miller has to invest a larger amount of capital for a smaller amount of turn-over. Now that ties up capital which otherwise could be producing something else. And that makes the ground meal more costly to the wholesale merchant, let us say. When the wholesale merchant buys it by the carload, he has to pay more for it. That means that he has to have a larger amount of working capital to get that carload of meal. And so some more of the meal is practically taken out, because when that meal is taxed, it makes less of it. He pays tax money, but the money comes back and buys the meal away. By the time the meal gets to the table to be eaten, it has gone through this process repeatedly, a toll being taken at each point of exchange. There is less of the goods produced, there is less of it bought, less of it handled, all the way down the line. It takes more capital to handle the same amount — or else less amount will be handled, which comes to the same thing either way.

I have made an illustration a number of times, years back, about a fellow in Texas named “Tex.” He raised cotton. And a fellow named “Ole,” in Wisconsin, or Minne­sota, he raised wheat. And when “Tex” tried to sell his cotton and he sent a hundred dollars worth of cotton into the market, and when “O1e” raised wheat and he sent a hundred dollars worth of wheat into the market on the way to “Tex,” by the time the cotton got to “Ole” to make over-alls and the wheat got down to “Tex” to make flap-jacks, the hundred dollars worth of wheat had been depleted by fifty dollars worth of taxes, for instance. So he had to put out a hundred dollars worth of cotton to get fifty dollars worth of wheat. “Ole” had to put out a hundred dollars worth of wheat to get a hundred dollars /fifty dollars?/ worth of cotton. Because each was taxed as it went towards the consumer. I think that kind of taxes is probably more disturbing to the processes of the market than the tax that does not accumulate.

Things come into the market from many sources and are elaborated in the market. When you penalize their inflow, that penalty is carried with them so that they diminish. When we consider the taxes on something, we ought to consider all the taxes that it bore while it was passing in through the market. Then the general principle will apply to that, and that will spread over the whole market.

Tax collectors don’t do as they used to do in ancient times. They used to take the household utensils and things out of the consumers’ hands. Now, when they don’t do that, the only taxation is at the point of exchange. They take it in money. And money is the proof that you put something in the market. When you try to take it out, well you can’t take it out because they have taken some of your money away. The more times it hits, the more injurious it is. So we should not consider a tax that is taken in any part of the market except the outlet as the whole tax. The whole tax is not the whole tax until it is on its way out. So a tax at the outlet, we can say, would be /less/ severe than a tax further back.

“ — Because the tax further back stops or inhibits growth. You could describe it by saying that since capital itself is pyramided in its growth, creating more and more capital, then when you tax capital, you do more damage than you would do if you took the same amount out of the end result. Because the amount of tax you took out of the original capital would have, if left alone, increased to a whole lot more than the amount of the tax — just as a given amount of wood taken from the trunk of a tree would be more damaging than the same weight collected from the outer twigs — or the same amount collected from a seedling as from a grown tree.”

Yes. Taxes are pathological, and I am not sure whether you can find sound principles running through pathological things or not. Maybe you can. But I know of an example in pathology that would match this pretty well. If your lungs are adapted to bring oxygen into your blood and take the carbon dioxide out of the blood — oxygenate the blood and turn it to a brighter red than before — that is the function of the lungs. But if you breath carbon monoxide, it reverses the process and, instead of bringing oxygen into your blood, it takes the oxygen out of it. That is what taxation does. And so a tax is a taking of the wealth out of the market instead of putting it in, as a normal contribution would be.

“So it is carbon monoxide to the social system.”