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Milton Friedman Speaks: Is Tax Reform Possible? (B1231) - Full Video — Transcript

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0:06Music
0:09Reality - captured in
0:11user friendly symbols and
0:12processed for understanding.
0:20Music
0:33The Idea Channel
0:55I attribute the large size
0:57of the audience here not
0:58to my drawing powers but
1:00to the fact that the topic
1:02is one that everybody in
1:03this room and in this
1:04country has a very deep
1:06and personal interest in.
1:08We are all involved in
1:13devoting about 40 percent
1:14of our working lives to
1:17supporting governmental
1:19activities. We all have
1:22some of them that we like
1:23and some that we dislike,
1:25but there are very few of
1:26us indeed who believe that
1:30we are getting our money's
1:31worth for the 40 percent
1:33of our income that is
1:35being used to support
1:37state, local, and federal
1:38governments and yet that
1:43percentage keeps growing.
1:46Here we are, and this is
1:47the real dilemma, the real
1:50problem that we want to
1:51talk about and consider:
1:53how is it that if you were
1:56to conduct a poll among
1:57the people of the United
1:58States, if you were to ask
2:00them, each and every one
2:02of them, do you think you
2:03are getting your money's
2:04worth for the 40 percent
2:06of your income that is
2:08being spent on your behalf
2:10by governmental
2:11bureaucrats, the number of
2:13people who would say yes
2:14to that would be very
2:15small, and all of those
2:18would be employees of
2:19the U.S. government.
2:26There might be a few state
2:27employees in it, too. On
2:30the other hand, we have a
2:34democratic system. We have
2:37elected representatives,
2:39they do what the public at
2:40large wants, and year by
2:43year they vote on our
2:46behalf to spend more and
2:48more of our money. How do
2:51we explain that dilemma
2:52and what can we do about
2:53it? What is it that
2:55produces a result that
2:58seems so clearly not in
3:00line with the fundamental
3:02wants of the people?
3:04That's really our topic
3:05tonight and that's what I
3:08mean by asking is tax
3:09reform possible. Everybody
3:12agrees on its
3:13desirability, but is it
3:15possible? My answer is
3:18going to be it is possible
3:20but not by the usual
3:21route. We are not going to
3:23get tax reform by a
3:26congressional committee in
3:27Washington or in the state
3:30house in this or other
3:32states voting lower taxes
3:35or voting an improved
3:37structure of taxes. That
3:40way is hopeless. It's a
3:42way we have been trying
3:43for years on end and has
3:44gotten us nowhere. The
3:47only effective tax reform
3:51is tax reduction. There is
3:53no other way in which we
3:55are going to get anything
3:56approaching reform, and
3:58even that is too ambitious
4:00a target at the moment.
4:02The most we can hope for
4:03in my opinion in the near
4:05future is to stop the
4:09steady increase in the
4:10fraction of our income
4:12that is effectively being
4:13spent by government. And,
4:17to go the last step of
4:18this argument, in my
4:19opinion the only feasible
4:22way of stopping tax
4:24increases is via
4:26constitutional limitation
4:28on government spending and
4:29government taxing. That in
4:31brief is the theme and the
4:35proposition that I want to
4:37set before you tonight. To
4:40render this view plausible
4:42I think we have to start
4:44by clearing away some of
4:46the misconceptions about
4:48taxes. We must dispose of
4:52some erroneous views that
4:54are widely held. There are
4:58three sets of erroneous
5:00views that I am going to
5:01talk about. The first of
5:04them is the Orwellian
5:07newspeak that is promoted
5:09by government, the saying
5:12of one thing when the
5:14substance of it is
5:15opposite. But the second
5:18erroneous idea that we
5:19need to clear the
5:20underbrush of is the
5:22erroneous idea of what
5:24constitutes fiscal
5:25responsibility that has
5:27been held by so-called
5:29fiscal conservatives.
5:31Those of us who regard
5:32ourselves as fiscal
5:33conservatives have a good
5:36deal of blame to share
5:39with the representatives
5:40of government who tell us
5:41fairy tales. And third, we
5:44have to dispose of the
5:46view that tax
5:47simplification is possible
5:50rather than a pipe dream.
5:52Let me start with
5:53Orwellian newspeak. I'm
5:55sure you all remember that
5:56great book 1984, and
6:00unfortunately we're
6:01getting all too close both
6:03to the date and the
6:04reality. In that book you
6:07will remember that one of
6:09the chief devices used by
6:11the government to keep its
6:12citizens in line was
6:14newspeak. The great slogan
6:18of that regime was the
6:20slogan "War is Peace."
6:23Well that's the kind of
6:24talk which always emanates
6:26from Washington. Let me
6:29give you the most
6:30immediate and most recent
6:31example. We have had a lot
6:33of talk from Washington
6:35about proposals to cut
6:37taxes. President Carter
6:40says he recommends a $25
6:42billion cut in taxes.
6:45Other people are trying to
6:46outbid him, to cut more or
6:48some to cut less. But the
6:51plain fact is that nobody
6:53is proposing to cut taxes.
6:56What is being proposed is
6:57simply to shift taxes from
6:59one kind to another. In
7:01the first place, the
7:04increases in the Social
7:11Security payroll tax
7:14plus the increases that
7:15are being proposed under
7:17the so-called energy
7:18bill--which is not an
7:19energy bill at all but, a
7:20major tax bill--between
7:25them amount to as much or
7:26more than the proposed tax
7:28cut. But in the second
7:30place, without anybody
7:32voting for it, your taxes
7:34are going to go up because
7:37inflation inevitably
7:39drives more and more of
7:41your income into the
7:42higher brackets. The
7:44increase in the taxes that
7:46the people of this country
7:48will bear as an indirect
7:50result of inflation
7:52without anybody voting for
7:54it will be more than the
7:57proposed cut that
7:59President Carter is
8:00talking about. So even if
8:02you look at taxes in the
8:03narrow and literal sense,
8:06taxes are going up not
8:08down. But even that isn't
8:10the whole story because
8:12the real tax that the
8:13American people bear is
8:15not measured by those
8:16payments that are called
8:18taxes. The real tax on the
8:21American people is what
8:22government spends. If the
8:25government spends 60 billion
8:26dollars more than it takes
8:29in, in the form of taxes,
8:32which is roughly what
8:33President Carter is
8:34proposing, who do you
8:35suppose pays that extra
8:36$60 billion? Do you think
8:39Santa Claus is going to
8:40pick up the check? Or
8:42maybe President Carter is
8:45counting on the Arab
8:46sheiks to pick it up, or
8:50maybe there is a tooth
8:51fairy out there who will
8:52pick it up. Those are
8:56fairy tales. You are going
8:58to pick it up because
9:00that's going to be paid
9:01for, but instead of being
9:03paid for directly in the
9:05form of income taxes or
9:07excise taxes or payroll
9:09taxes it will be paid for
9:10indirectly in the form of
9:11inflation, a hidden tax
9:15which nobody has to vote
9:17for but which people have
9:18to bear and pay. There is
9:20no other source. The
9:22proposal to cut explicit
9:25taxes is simply a proposal
9:27to raise less money in the
9:29form of income, excise,
9:31and so on taxes, and more
9:33money in the form of the
9:34hidden tax of inflation.
9:37Well you may say to me,
9:38"But there's still another
9:39alternative. The
9:40government can borrow it."
9:43But when the government
9:44borrows, that's also only
9:46another form of hidden
9:47tax. If the government
9:49borrows, there is less
9:50available to build houses
9:53or machines or factories;
9:57that imposes a larger
9:59burden in the form of
10:00future interest on our
10:01debt payments. That's
10:04really a hidden tax on
10:07your wealth and your
10:10children's future wealth.
10:12It's also an indirect form
10:13of taxation. Government
10:16spending corresponds to
10:19that part of the national
10:20income which you and I
10:23cannot control as we wish
10:25but which is spent for us,
10:27on our behalf, by our
10:29supposed servants in
10:31accordance with our
10:32supposed instructions
10:34through the representative
10:36method. In no way is
10:40anybody proposing to cut
10:41taxes because President
10:43Carter has proposed an
10:44increase in federal
10:46government spending, an
10:48increase which is larger
10:51than the anticipated
10:52increase in prices; so
10:54it's an increase in real
10:55terms and indeed a larger
11:00increase than that which
11:01appears in his official
11:03budget because of the
11:04continued use and
11:06invention of more and more
11:08sophisticated methods to
11:10conceal actual spending,
11:13the latest gimmick being
11:15to treat subsidies given
11:19by the government as
11:20refunds of taxes collected
11:22from somebody else. Now
11:24that's a nice notion,
11:25isn't it? I can understand
11:27subtracting a refund to me
11:29from the tax I pay, but a
11:32refund to you from my
11:33taxes? That's government
11:35spending; that isn't a
11:36reduction in tax receipts.
11:40So the first example I
11:42would give you of newspeak
11:45is the slogan "Higher
11:48Taxes Are Lower Taxes."
11:52The second is the notion
11:56that somehow there are
11:57taxes on business and
11:58there are taxes on people.
12:01There has been a great
12:02deal of talk and I use
12:06only the most recent
12:07proposals of President
12:08Carter for illustration
12:10because the same kind of
12:11talk has emanated from
12:12every Administration,
12:13Republican or Democratic.
12:16There is talk about how
12:16"we're not going to raise
12:17taxes on people; we're
12:18going to raise them on
12:19business, on corporations."
12:21The most obvious
12:22example is with
12:23Social Security tax.
12:26Supposedly that tax is
12:28half on employee and half
12:30on employer but that's a
12:32fake; it's all paid by the
12:33employee. It adds to the
12:35wage cost of hiring a
12:36person. If an employer has
12:39to pay in addition to a
12:40wage--what is it
12:44currently?--close to 6
12:45percent of the wage, well
12:50that's that much less that
12:51he has available to pay as
12:52wages in trying to hire
12:53somebody or bid somebody
12:54away from somebody else.
12:56But more fundamentally,
12:58businesses can't pay
12:59taxes. A business isn't a
13:02person. Only people can
13:04pay taxes. A corporate
13:06executive may write the
13:07check, he may sign his
13:09name to it, but who is
13:10paying it? It either comes
13:13from the customers or it
13:15comes from the workers or
13:17it comes from the
13:18stockholders. Where else
13:19can it come from? Again,
13:21is there somehow or some
13:24way in which some people
13:26can pay or some funds can
13:28be gathered with nobody
13:29paying it? I give you
13:34another example of the
13:35same kind of misleading
13:37talk about taxes on
13:39business and taxes on
13:40people in connection with
13:41a local initiative here in
13:43the state of California,
13:44the Jarvis-Gann initiative
13:47to reduce property taxes.
13:50The opponents of that are
13:51saying, "Oh, that's a
13:52fake; that isn't going to
13:54reduce taxes on people,"
13:56because, they say, "a lot
13:58of that property is owned
13:59by business; that's going
14:00to reduce taxes on
14:01business." Well, tell me,
14:02how does business pay
14:03taxes? They don't get the
14:06money from the heavens.
14:10They don't have printing
14:11presses in their
14:12basements. The only way a
14:14business can pay taxes is
14:16by collecting it from
14:17customers. And if they pay
14:19it over to the government,
14:20that's not available to
14:21cut the price to their
14:22customers; it's not
14:23available to pay wages to
14:25their employees; it's not
14:26available to pay dividends
14:29to their stockholders. So
14:32of course all taxes are
14:33borne by people and by
14:35nobody else. I may say
14:37that this same illusion is
14:39fostered by businessmen.
14:42The businessmen of this
14:43country use exactly the
14:44same language. They send
14:45their lobbyists down to
14:46Washington and say, "We
14:48want relief from taxes on
14:49business." That's
14:51nonsense. There are no
14:53taxes on business and by
14:56talking that way they are
14:57only fostering the
14:58illusion that somehow or
15:00other, if I may again word
15:03it as Orwell would word it
15:05in newspeak, there is no
15:07free lunch but there are
15:09free taxes. A third
15:13example of newspeak is the
15:17double standard of
15:18fairness which is always
15:20being used, one for tax
15:21cuts and the other for tax
15:23increases. The proposals
15:28that have been made by the
15:29White House propose to
15:32substitute a tax credit
15:34for a personal exemption.
15:36You are now permitted in
15:37the tax code to deduct a
15:40small sum as a personal
15:43exemption before you
15:44compute the income on
15:46which taxes are levied. It
15:48is now proposed that
15:49instead of your being
15:50allowed to deduct that
15:51from your income you have
15:53a credit of so many
15:55dollars which you can
15:56deduct from your taxes.
15:58Said Secretary Blumenthal
16:00a few weeks ago on a
16:02nationwide TV program,
16:04this was fair because, if
16:07you increase the tax
16:08credit, you reduce the tax
16:11for everyone by the same
16:13dollar amount; if you make
16:15a tax credit $20 higher,
16:16everybody gets a $20
16:18reduction in taxes;
16:19whereas, he said, if we
16:21make the exemption higher,
16:24if we add an extra $100 to
16:25a personal exemption, that
16:28only saves $14 for
16:31somebody in the lowest
16:32bracket but it saves $70
16:33for somebody in the
16:34highest bracket. And
16:36therefore, he said, that's
16:37not fair. Now suppose you
16:39turn that around. If
16:41fairness consists in
16:43reducing the taxes of
16:45everybody by the same
16:46number of dollars, when
16:49you come to increased
16:50taxes does fairness
16:51consist of increasing the
16:52tax on everybody by the
16:54same number of dollars? I
16:57don't think even Mr.
16:58Blumenthal would have the
17:00effrontery to say to a
17:02nationwide audience that
17:03fair tax increases consist
17:05of $20 increases in taxes
17:07on the man with a $1,000
17:09annual income and the man
17:10with the $100,000 annual
17:11income. So he is
17:14essentially employing a
17:16double standard in
17:18discussing tax reductions
17:20and tax increases. To give
17:24another example of the
17:25newspeak that
17:27unfortunately Mr.
17:28Blumenthal has been
17:29engaging in, in discussing
17:32the proposed tax change,
17:34he used the following
17:35language which is very,
17:36very common among
17:37governmental officials
17:38discussing taxes. He said,
17:40"In our proposal we are
17:43giving so many billions of
17:45dollars to business." Now
17:48what do you think of that?
17:50Anything he doesn't take
17:51from you, he's giving to
17:52you. That's exactly the
18:00same philosophy that's
18:02behind another beautiful
18:04semantic invention. Have
18:07you ever heard of the
18:08semantic invention of "tax
18:09expenditures"? That was
18:12invented in order to refer
18:16to taxes that were not
18:19collected because of
18:20so-called loopholes. A
18:24simple example is that you
18:25are allowed and permitted
18:26to deduct interest that
18:28you pay in computing your
18:30taxes. The Treasury has
18:32figured out that because
18:34of that deduction taxes
18:37are lower by so many
18:38billions of dollars than
18:39they otherwise would be,
18:40and that lower amount of
18:42taxes is described as a
18:45tax expenditure--namely,
18:47the government is spending
18:48that money; it's spending
18:49it by letting you keep it.
18:54All of these newspeak
18:59items, or at least the
19:01last few I have referred
19:03to, are all part of the
19:04same approach. The
19:05fundamental philosophy
19:07that underlies this
19:08approach is that you
19:09belong to the government.
19:12Your income is the
19:13government's income, but
19:15of course like any slave
19:17owner the government wants
19:19to maintain
19:20productivity--it has to
19:22keep you working--and for
19:24that purpose will let you
19:25keep a little bit of your
19:26income so that you can pay
19:28for your food, but the
19:29minimum amount only, not
19:31for those three martinis.
19:39You may keep a minimum
19:41amount so that you can pay
19:42for enough food, clothing,
19:46and housing to keep you
19:47working, and it will have
19:49to let you keep a little
19:50bit of the extra that you
19:51earn so that you have an
19:52incentive to work. On
19:55these grounds that's the
19:58only justification for
20:00having a personal
20:01exemption; it's the only
20:03justification for having a
20:05tax of less than 100
20:06percent. I suggest to you
20:09that if you look carefully
20:10at the language that
20:11emanates from tax
20:13collectors all over world,
20:15fundamentally, and the
20:18reason why this whole
20:19problem is so important,
20:21the underlying theme is
20:23that the government is the
20:24master, the citizen the
20:25slave, his income belongs
20:27to government, and he is
20:29allowed to keep some of it
20:31by the generosity and
20:33majesty of Big Brother.
20:37Now that's the first set
20:40of erroneous views that we
20:43need to dispose of, that
20:46taxes are measured by
20:47government spending not by
20:49tax receipts, that people
20:52and only people can pay
20:53taxes--there are no taxes
20:55on business, and that
20:59people belong to
21:00themselves and not to the
21:01government and that we
21:03should be deciding how
21:04much we're going to spend
21:07through government for
21:09things that we as citizens
21:10want and not handing over
21:12to the government the
21:13reins to decide how much
21:14we can spend. But I want
21:17to turn to the second of
21:18these sets of erroneous
21:19views that I think impedes
21:22proper tax reform and this
21:25is the erroneous view that
21:27has been held by so-called
21:28fiscal conservatives that
21:30the real test of fiscal
21:33responsibility is whether
21:34you have a deficit or not.
21:38This is the view that is
21:39incorporated in the ideas
21:42of many well-meaning
21:44citizens who have been
21:46seeking to get a
21:48constitutional amendment
21:50to require on the federal
21:51level a balanced budget.
21:53Now I am not against a
21:54balanced budget but I
21:57submit to you that by
21:59emphasizing primarily the
22:01deficit, fiscal
22:03conservatives have ended
22:05up being the front men for
22:08big spenders. The typical
22:11process has been very
22:12straightforward: the big
22:14spenders have voted
22:16governmental expenditures
22:17that have produced a
22:18deficit; the fiscal
22:20conservatives have
22:21scratched their heads and
22:22said, "That's terrible! We
22:24mustn't have a deficit,"
22:25and so they have gone to
22:26work to get higher taxes.
22:30As soon as the taxes have
22:32been increased and the
22:33deficit is coming within
22:35reason, the big spenders
22:36are off again and the end
22:38result is more and more
22:40government spending. This
22:43point is very closely
22:44related to the point I was
22:45making earlier: the real
22:47tax is what government
22:49spends not what it takes
22:51in, in the form of
22:54so-called taxes. The real
22:57problem is not the
22:58deficit; the real problem
23:00is not the government
23:01debt. The real problem is
23:04government spending. I
23:06would much rather have a
23:07federal budget of 200
23:11billion dollars with a 100
23:12billion dollar deficit than to
23:14have a government budget
23:15of $400 billion with no
23:17deficit because the
23:21government budget of 400
23:22billion dollars is simply twice
23:24as much taken from the
23:27disposition of the citizen
23:29and spent on his behalf by
23:31government. That's the
23:32real problem. Let me show
23:34you how shortsighted is
23:36the concentration on the
23:37deficit. If you as an
23:41individual engage in a
23:42deficit, if you spend more
23:46than you take in, then you
23:49will find that your debt
23:51grows or your assets
23:53shrink. But the federal
23:55government has been having
23:56a deficit year after year
23:59and yet the federal debt
24:01today is lower in real
24:04terms, lower as a fraction
24:06of the national income,
24:09than it was right after
24:10World War II. How can that
24:12be? Doesn't that violate
24:15the laws of arithmetic?
24:16Not at all, because the
24:18government has been
24:19imposing a tax, namely
24:21inflation, which does not
24:23show up in the books as a
24:24tax but which has been
24:26paying off the debt. The
24:31debt is a lower fraction
24:32of national income today
24:33than it was twenty years
24:34ago because we have had so
24:37much inflation in the
24:38meantime that the real
24:40value of the debt, the
24:41debt measured in terms of
24:43purchasing power, has gone
24:44down and not up. In that
24:47sense we haven't been
24:50having a deficit; it has
24:51been a fake. What we've
24:53been having is the use of
24:54a very bad form of
24:56taxation. In any event, to
24:59stress my main point, the
25:03effect of putting major
25:05emphasis on the deficit
25:07has been to convert fiscal
25:09conservatives into the
25:12front men for the big
25:13spenders. The big spenders
25:15get the political gain
25:17from the spending, the
25:19fiscal conservatives get
25:20the political cost of
25:23raising the taxes to pay
25:24for it, and the result is
25:28higher and higher
25:29government spending and a
25:30higher and higher true tax
25:33burden. Now I want to turn
25:39to the third set of
25:41erroneous views and that
25:43is the view that somehow
25:44tax simplification is
25:45possible rather than a
25:46pipe dream. The question
25:50there is--that's not as
25:51easy as it might seem--why
25:53is it that the tax system
25:54is so complicated? Why are
25:56the rates so graduated?
25:59Why do we have a tax
26:01system which has an almost
26:03infinite number of rules
26:04and regulations, so that
26:06nobody in this room could
26:07possibly know them all,
26:09with tax rates for an
26:11individual that start at
26:1414 percent on the personal
26:16income tax and go up to 70
26:18percent, and that's on top
26:21of corporate taxes so that
26:24the owners of corporations
26:25pay a double tax? Why do
26:28we have such a system? One
26:32argument people might make
26:33is that it's for equity,
26:35but it's not so. You can
26:38go from the left of the
26:40political spectrum to the
26:41right and have a hard time
26:44finding anybody who will
26:45say that our present
26:46personal income tax system
26:48is an equitable system.
26:51People who are
26:52fundamentally in the same
26:53economic position will pay
26:54very different taxes
26:55according to all sorts of
26:56accidental elements--the
26:58form in which their
26:59property is, whether they
27:00have been clever or not at
27:02getting tax shelters, all
27:05sorts of things that ought
27:06to have nothing to do with
27:08the tax burden. Well then
27:12if we don't have it for
27:13equity, maybe we have this
27:14complex and highly
27:15graduated system for
27:16revenue. Not so. It
27:19doesn't yield any revenue.
27:22Let me demonstrate that to
27:24you in a very simple way.
27:27Suppose you were to
27:28consider the following
27:29change in the law: you
27:31leave the personal income
27:32tax exactly where it is
27:35except you replace every
27:38tax rate which is higher
27:40than 25 percent by 25
27:42percent; don't make any
27:44other change. So the 70
27:47percent rate becomes 25
27:48percent, etc.--the highest
27:50rate becomes 25 percent.
27:53Now you might say to me,
27:54"Well, that'll cost you a
27:55lot of money." Not so. In
27:59the first instance if you
28:01supposed that under that
28:02system everybody reported
28:04exactly the same amount of
28:06income that he now
28:07reports, tax receipts
28:09would go down by 7-1/2
28:11percent. But that would be
28:14only the first. If the top
28:17rate were 25 percent,
28:19would it pay you to spend
28:2050 cents on the dollar to
28:21get a tax shelter? Would
28:23it pay you to hire these
28:24expensive tax lawyers to
28:26avoid 25 cents on a
28:27dollar? You know in 1929
28:31the top rate was 25
28:32percent. If you take the
28:35number of people who
28:36reported high incomes in
28:381929 and adjust for what
28:41has happened to the price
28:42level, the population, and
28:43so on, there were ten
28:45times as many as there are
28:48today. That isn't because
28:52the income distribution
28:53has changed that much;
28:54it's because with our
28:56present tax system the
28:59private enterprise system
29:00has been very efficient in
29:02finding ways to avoid
29:03those high taxes, but not
29:06without cost. If you had a
29:10top rate of 25 percent the
29:13amount of income that
29:14would be reported for tax
29:16purposes would go up
29:17sharply. I guarantee you
29:20that if you take the time
29:21to look at the detailed
29:22figures you will agree
29:25with me that there is no
29:28doubt whatsoever that a
29:30top rate of 25 percent,
29:31with the law otherwise the
29:32same, would yield more
29:34revenue than you get now.
29:37The Treasury would get
29:38more money and the
29:39taxpayer would be better
29:40off. Now how can that be?
29:44That looks as if somehow
29:45or other I'm getting a
29:46free lunch. Not at all.
29:50You must distinguish
29:51sharply between the
29:53revenue from a tax system
29:56to the Treasury and the
29:57cost to the taxpayer of
30:00paying those taxes. Your
30:03taxes are really higher
30:05than the checks you send
30:06to the government.
30:08In addition you should
30:09include in the cost of taxes
30:12the cost to you of tax
30:14shelters; the cost to you
30:17of decisions that are made
30:18on tax grounds, of
30:19spending one way rather
30:20than another because that
30:21will avoid taxes, of not
30:23engaging in activities
30:24because it just isn't
30:25worth it given that for
30:27every dollar extra you
30:28earn you will only get to
30:29keep a little. There is no
30:32doubt that the total
30:36revenue to the Treasury
30:37would go up and the total
30:40cost to the taxpayer would
30:41go down and nobody would
30:43get hurt except for two
30:49important groups, which is
30:51why this reform is
30:52impossible. Who are those
30:55two groups? Well, one of
30:57them is very obvious; it's
30:59the tax lawyers and
31:00accountants. The other is
31:04less obvious but more
31:06important; it's the
31:07members of Congress. You
31:10put a 25 percent top rate
31:12on the tax system, and
31:14what do congressmen have
31:15to sell in order to raise
31:17campaign funds? I am not
31:21saying this as a
31:22pleasantry; it is
31:23literally true. If you are
31:24a congressman you have to
31:25engage in activities which
31:27will enable you to get
31:28re-elected. One of the
31:33most important of those
31:34activities is making the
31:36tax system more complicated.
31:44By making the
31:45tax system more
31:46complicated, on the one
31:48hand, you get people who
31:55are willing to contribute
31:56to you and work for you in
31:58order to try to get a
31:59special provision which
32:00will benefit them. On the
32:02other hand, you play the
32:03other side of the street
32:04as well. You have people
32:06who are willing to
32:07contribute to you and work
32:08for you in order to avoid
32:09having a special burden
32:10placed on them. If you had
32:11a simple tax system of a
32:14kind which undoubtedly
32:16would be preferable that
32:18possibility would disappear.
32:23Let me put this
32:24in another way. You might
32:28think offhand that there
32:29is a real basis for
32:31compromise between what
32:32for simplicity I'll call
32:33the left and the right on
32:34this issue. If you talk to
32:37people on the left they
32:38will say our personal tax
32:42system is unconscionable
32:44because of all the
32:45loopholes, all of the
32:46special deductions, the
32:47tax shelters that can be
32:48created. And they would
32:51say to you if you asked
32:52them, "Would you be
32:54willing to accept lower
32:56tax rates in order to get
32:57a broader base?"--almost
33:00every one of them will say
33:01yes. Suppose now I go to
33:03the so-called right and I
33:05say to them, "Would you be
33:07willing to accept a
33:08broader base and fewer
33:09deductions in order to
33:10have lower rates?" Almost
33:12everybody will say yes.
33:14Offhand it looks as if
33:16there is a compromise
33:17here, there's a deal, that
33:18you can get both right and
33:19left together on a great
33:21simplification of the tax
33:23system which would
33:24eliminate a great host of
33:26deductions and
33:27subtractions and would
33:28sharply lower the rates.
33:30You know how low those
33:31rates could go? If you
33:33kept present exemptions
33:34and eliminated all
33:35deductions and simply
33:38taxed at a flat rate all
33:41income in excess of
33:43present exemptions and
33:45strict occupational
33:46expenses, the best
33:48estimates are that it
33:49would take a flat rate of
33:50about 16 percent to raise
33:53the same revenue that you
33:54now raise from these rates
33:56going from 14 to 70
33:58percent. Almost everybody
34:01would be better off under
34:02that arrangement, and as I
34:03say you might think you
34:04have a deal for it but you
34:06don't. Why not? For three
34:09reasons. The first is that
34:12neither side trusts the
34:13other and both are right.
34:22The left would say, "We
34:24make this deal and the
34:25first thing that'll happen
34:26is that those deductions
34:28will creep back in." And
34:29they're right; that's
34:30exactly what would happen.
34:32The right would say,
34:33"We'll make this deal and
34:35the first thing we know
34:37those rates will start to
34:38rise and become more
34:39graduated." And they're
34:40right; that's exactly what
34:41would happen. So this is
34:43not a deal that can be
34:44carried off except only if
34:47you could do it through
34:48constitutional amendment
34:49which would really freeze
34:50it. The second reason is
34:55the importance of
34:56appearance versus reality.
34:59Everybody really knows
35:01deep down that these
35:03highly graduated taxes do
35:06not produce any equity,
35:08everybody knows deep down
35:09they don't produce any
35:10revenue, but you have to
35:14maintain appearances.
35:16Everybody wants to be on
35:17the side of equity,
35:18everybody wants to be on
35:19the side of revenue, and
35:21so we have the people
35:24operating in this
35:25political marketplace who
35:27will tell you, "We have to
35:29maintain those high rates
35:31because we must appear to
35:33be taxing the rich on a
35:35different rate than the
35:36poor." The third reason
35:39and the most important of
35:40all is the one I have
35:41already mentioned. If you
35:42made such a deal and got
35:44such an arrangement and
35:45such a simplified tax
35:46system Congress would be
35:48out of business. It would
35:50be very, very difficult
35:52for them to have something
35:53to sell. How can we
35:55proceed then? I submit
35:58that the way we have to
35:59proceed is by facing up to
36:02our situation and asking
36:04what is the fundamental
36:05explanation. Why is it
36:10that we have been having a
36:11situation in which in a
36:13democratic society
36:15government spending has
36:16been going up as a
36:17fraction of the income
36:18even though very few
36:19people feel that they get
36:21their money's worth? I
36:24believe that the
36:25fundamental explanation is
36:26that there is a defect in
36:28our political structure
36:30and that we must not kid
36:32ourselves into thinking
36:33that we are going to
36:34remedy it by the easy way
36:36of electing the right
36:37people to office. That
36:38will not work. Once they
36:41get into office they are
36:42going to be subject to the
36:43same pressures and the
36:45same drives as the people
36:48we might regard as the
36:49wrong people. In fact I
36:53have often said that the
36:54right solution is not to
36:55elect the right people to
36:56office but to make it
36:58politically profitable for
37:00the wrong people to do the
37:02right thing because,
37:06unless it's politically
37:07profitable for the wrong
37:08people to do the right
37:09thing, the right people
37:10won't do it either. I
37:14should think by this time
37:15we have had ample
37:16experience to demonstrate
37:17the validity of that
37:18proposition. But what is
37:21this defect? Why is it
37:23this happens? I believe
37:25the fundamental defect is
37:27that the way in which a
37:28government budget is
37:29constructed is by voting
37:32individual pieces and then
37:34adding them on. With
37:36respect to each individual
37:38piece there is a group
37:43that feels very strongly
37:44about it. They are going
37:46to make a big effort to
37:47get that in. The cost is
37:51very little and it is
37:52spread over everybody, and
37:54nobody makes a big effort
37:55to stop it. The result is
37:59that you get one little
38:00piece piled on top of
38:01another, the total adds up
38:04to more than the public at
38:05large would like to spend,
38:07but the public at large
38:09never gets a chance to
38:11vote on that total. When
38:14they come to vote for
38:15their individual
38:16representative, they are
38:17much more likely to vote
38:18for him on the basis of
38:20the special measure that
38:21they feel strongly about
38:24than they are to vote for
38:26him on the basis of some
38:28kind of overall reduction.
38:31Consider your own
38:32position. I've talked to
38:33members of state
38:34legislatures and federal
38:35congressmen and they will
38:37say to you, "Now here are
38:38these people who come to
38:39me and say we have to have
38:40more money spent on, let's
38:42say, education, or on
38:47mental health facilities,
38:49or on water resources--you
38:50name it. And I say to
38:53them, well you know that's
38:54fine, but where are we
38:56going to get the money?
38:57Our budget is already too
38:59big. And they say to me,
39:02'You mean you're a
39:03hard-hearted, cold-blooded
39:07fellow who wants to stamp
39:08on mental defectives,' or
39:11on the ill or on whatever
39:13other emotional group you
39:15can bring up." Now a
39:19legislator will tell you,
39:20"This particular measure
39:21by itself is going to
39:22raise taxes by a dollar a
39:23person. There is nobody
39:25who comes around and
39:26knocks on my door and
39:27says, 'Don't you put that
39:28extra dollar on my taxes.'"
39:31If you look at the
39:32record, the plain fact
39:35is that increasing
39:38government spending has
39:39always been politically
39:40more profitable than
39:42reducing taxes. And the
39:45reason, as I say, is
39:46because the expenditures
39:49are concentrated and
39:51people know that they are
39:53benefited. The taxes are
39:54diffused. Moreover, there
40:01is a second point that
40:02needs to be emphasized.
40:04You get all these measures
40:05passed and you might say,
40:06"Well, but then why are
40:07people dissatisfied with
40:08the total? After all you
40:12got what you wanted; he
40:13got what he wanted "Why is
40:15it that this 40 percent of
40:17government spending
40:18doesn't correspond to what
40:22the public wants? Why does
40:23the public feel that they
40:24are getting cheated, that
40:25they are not getting their
40:26money's worth? The answer
40:28is because, once you start
40:32giving somebody else's
40:33money away or spending it,
40:38somebody will compete to
40:39try to get it and the
40:41effect of that will be
40:45that there are no benefits
40:46from the government
40:47spending. Government sets
40:48out to spend a billion
40:49dollars--whatever it
40:50is--for a good purpose.
40:53That means it's worth
40:54somebodys efforts to
40:55spend a billion dollars to
40:56get that billion dollars.
40:59You may spend that billion
41:00dollars in the form of
41:02propagandizing congressmen
41:04to get it passed, in the
41:06form of election
41:08contributions, but you may
41:09spend it in much more
41:10complicated forms--in
41:11lawyers' fees, in
41:14preparing projects, in
41:18knocking at the door of
41:19government officials who
41:21have it to distribute. So
41:24the fact is that there is
41:26an enormous difference
41:28between the benefits
41:29people get from government
41:30spending and the benefits
41:31people get when they spend
41:33their own money, and that
41:37difference derives from
41:39the fact that governments
41:40are always spending
41:41somebody else's money. The
41:45competitive market is a
41:46marvelous invention; it
41:47works. It works in the
41:49economic sphere and it
41:50works in the political
41:51sphere, and the way in
41:53which it works is that
41:55market competition tends
41:58to lead people to spend
42:01nearly as much money to
42:03get the subsidies as the
42:05subsidies are worth with
42:07the result that everybody
42:08feels cheated. The net
42:10benefits are much smaller
42:11than the gross expenditures.
42:15The question is,
42:16how can you remedy
42:17this defect? I think
42:20myself that there is
42:21fundamentally only one way
42:22in which you can remedy it
42:25and that is by a political
42:26change in the form of
42:29constitutional provisions
42:32which will set a limit to
42:33government spending. Every
42:35individual in his private
42:37life has a budget to
42:38spend. If he considers
42:40whether to spend more on
42:42one thing he has to ask
42:45himself, "Where is it
42:46going to come from? Where
42:47am I going to cut?" But
42:49our legislators don't have
42:50that kind of budget limit.
42:52They can vote to spend
42:53more and they will say,
42:55"Where will it come from?
42:56Oh, somewhere; the
42:57taxpayer will pay for it."
42:59What we need is to give
43:01our legislators a budget,
43:03to say this much and no
43:05more; then the special
43:08interests can fight with
43:09one another instead of the
43:11special interests ganging
43:13up on you and me and
43:15themselves. Don't kid
43:16yourself; we're all
43:17special interests, we're
43:18all guilty, we're not
43:19innocent. There is nobody
43:21in this room I am sure who
43:23has not at one time or
43:24another favored what he
43:28would recognize as special
43:29interest legislation. Of
43:31course it's different when
43:33it's our special interest.
43:35We all know that what's
43:37good for us, well that's
43:38good for the country, too.
43:43It's not a question of
43:46holier than thou. It's a
43:48question of having a setup
43:50under which we in trying
43:52to fight for our special
43:53interest have to fight
43:55within a limited budget.
43:56As you know, I am
43:57describing the proposal
43:59that got started in the
43:59state of California under
44:01Proposition 1 four years
44:03ago. I have no hesitancy
44:06in discussing that because
44:08I am proud to say that I
44:09was involved in that
44:10campaign and in the design
44:12of that amendment and in
44:13trying unsuccessfully to
44:15get it passed. The
44:19interesting thing to me
44:20about the Prop 1 amendment
44:25was that at the time we
44:26were drawing it up here in
44:27the state of California to
44:28set a limit on government
44:29spending, to say that the
44:31state government shall
44:32spend no more than X
44:33percent of the personal
44:35income of the people, we
44:37made it extremely
44:38complicated because we
44:40tried to cover every
44:42possible loophole. We took
44:44it for granted that if it
44:46were enacted the
44:48legislators would try
44:50their best to evade it. I
44:53believe now that that was
44:54a mistake. The one respect
44:56in which I have changed by
44:58opinions greatly since
45:00then is to discover that
45:02if you could once get this
45:03through you could count on
45:06the members of state
45:09legislatures and of the
45:10federal legislature to be
45:12your open or secret allies
45:16in making it effective.
45:18Why? They are decent
45:22public-spirited human
45:23beings, no different from
45:24you and me. They are now
45:25subject to very difficult
45:27pressures, of those I have
45:28described, but they would
45:30be in so much better a
45:31position with that
45:32amendment because now
45:34somebody comes to them and
45:35says, "You've got to vote
45:36more money for this good
45:37cause or that good cause,"
45:38and they say, "I agree
45:39with you; that's a good
45:40cause. Where shall I cut?
45:42I have a total budget. We
45:43can't vote more unless we
45:45vote less for something
45:46else. What shall we vote
45:47less for?" So it would
45:49provide the legislator
45:50with protection, enable
45:53him to perform his
45:54function more effectively.
45:59The question at issue is,
46:00is there any reason for
46:01hope that we will get this
46:04fundamental defect in our
46:06political structure
46:07reformed? I believe the
46:10answer is that there is.
46:13There is an enormous
46:14ground swell of taxpayer
46:18revolt. You are feeling it
46:21in this state with the
46:23large number of people who
46:25signed the petition for
46:27the Jarvis-Gann amendment.
46:29You are feeling it in
46:30every state throughout the
46:32country. The taxpayers are
46:34simply getting fed up with
46:37the burden of government
46:40and with the disproportion
46:44between what they see as
46:45the benefits from
46:46government spending and
46:47the cost of government
46:48spending, and I have been
46:50impressed with how rapidly
46:51the ground swell for
46:53constitutional limitation
46:54is growing. In the state
46:57of Tennessee a
46:58constitutional convention
47:00has recently introduced a
47:01spending limitation into a
47:04proposal that will go
47:05before their citizens this
47:07spring. It may well be the
47:10first state in the country
47:11that will have an explicit
47:13limitation on government
47:14spending in its
47:15constitution. In the state
47:17of Massachusetts, of all
47:18states--it's a state which
47:20has gotten the nickname of
47:21Taxachusetts because it's
47:25a state which has one of
47:26the highest levels of
47:27state government spending
47:30in the country.
47:32But, in the state
47:33of Massachusetts
47:34a citizens group
47:36has gotten through
47:37the first stage in a
47:38process for a
47:40constitutional amendment
47:41along these lines. It so
47:43happens that their
47:44constitution requires a
47:45long time before
47:46amendment--three or four
47:48years. This amendment was
47:52tried as you know a year
47:53or two ago in Michigan.
47:56It was defeated in Michigan
47:57narrowly by exactly the
47:59same groups that defeated
48:01it in California, namely
48:03the special interest
48:05groups who wanted to see
48:07larger government spending
48:09led, I'm sorry to say, by
48:12the educational
48:13associations of the
48:14state--the Michigan
48:15Educational Association in
48:18Michigan and the
48:19corresponding California
48:20association here. Don't
48:22misunderstand me. Many of
48:23the individual teachers
48:24are strongly in favor of
48:25it but the bureaucracy,
48:28the organization, the
48:30administration of
48:31education is strongly
48:32opposed to it--and for
48:33very good reasons. Because
48:36they are right; they are
48:37pursuing their own
48:38interests; because they
48:39see that under such a
48:42limitation it would be
48:43more difficult for them to
48:44get ever-increasing
48:45expenditures to raise
48:47their salaries and
48:49perquisites. They are not
48:52working against their
48:53interests, and they have
48:54been enormously effective
48:56in both Michigan and
48:58California, but I think
48:59that we are learning and
49:01that the public sentiment
49:03for this is growing, and
49:05sooner or later you'll get
49:06it passed. After all we
49:09must remember that very
49:11few major changes in
49:12government have ever been
49:13enacted the first time.
49:15You have to stick with
49:17them and that's a good
49:19thing because we only want
49:21things to be done insofar
49:23as the public at large is
49:24really persuaded that they
49:25are desirable and
49:26effective. In state after
49:30state there is a movement
49:31of this kind, but there is
49:32also such a movement on
49:33the federal level. The
49:35Southern Governors
49:36Conference about two or
49:38three years ago appointed
49:39a task force, led by
49:42Governor Edwards of South
49:44Carolina, and they
49:45constructed a
49:49constitutional amendment
49:50for the federal government
49:51that would limit federal
49:52government in the same way
49:55to a certain percentage of
49:58the national income.
50:01That's at a very early
50:02stage. But in my opinion
50:05in the long range that is
50:07the only hope we have for
50:09stopping the growth of
50:12government, for holding it
50:14back. As a final rather
50:17curious reason for hope, I
50:19might cite to you the
50:21example of the United
50:22Kingdom. Great Britain
50:25which has been preceding
50:27us down this road, Great
50:30Britain whom we have been
50:31imitating, where
50:33government spending is not
50:3540 percent of the national
50:37income as it is in this
50:39country but close to 60
50:40percent, has been having a
50:43very effective tax revolt.
50:47A Labour government for
50:48two years in a row has
50:51been led by political
50:52pressures to reduce
50:54government spending as
50:55a fraction of income.
50:57I don't know how long that
50:58will last but it is a sign
51:02that it is possible for
51:03the public at large to
51:04express its views and for
51:06those views to be
51:07effective. If we are to be
51:09effective, I think we have
51:10to direct our efforts
51:13along the lines of
51:15reforming and improving
51:18our constitutional
51:20structure. That's the kind
51:21of reform that's possible.
51:23We must not waste our
51:24efforts and suppose that
51:26we're going to be
51:27successful in getting tax
51:30reform of the other kind,
51:33of any substantial
51:35improvement or
51:36simplification in the tax
51:38system, any reduction in
51:40total government spending
51:42by attacking one
51:43particular expenditure or
51:45another. We must look at
51:48the thing as a whole and
51:49go to the fundamental
51:51source of our problem.
51:52Thank you.
52:16Dr. Friedman, you
52:17stated that the
52:19Administration's energy
52:21proposal is really a tax
52:23program in disguise. Would
52:24you elaborate on that or
52:26explain what you really
52:27mean by it? Yes, it's very
52:29straightforward. The
52:31proposed energy program
52:33would impose a very heavy
52:35tax as you know on crude
52:36oil with a very large sum
52:39of revenue coming from it.
52:42That tax would be disposed
52:44of by government for
52:46various governmental
52:48purposes. The statement is
52:50that it would be refunded,
52:53but if it were really
52:54given to people in
52:55accordance with the amount
52:56of energy they use the tax
52:59wouldn't serve its alleged
53:00purpose. Its alleged
53:02purpose is to give people
53:03an incentive to conserve.
53:05Well I have no incentive
53:06to conserve if what I
53:07spend with the left hand
53:08is going to be given back
53:09to me with the right. And
53:11if you look at the actual
53:12proposals for using those
53:15funds, it's not at all
53:17clear that they are
53:18intimately related to the
53:21purpose of energy. That's
53:25what I mean by saying it's
53:26a tax program in disguise.
53:28If you really want to
53:29serve the function that
53:31the energy program should
53:32serve, namely to have a
53:34more rational and sensible
53:36allocation of energy in
53:37this country, we all know
53:38how to do it. That would
53:40be to abolish the
53:41Department of Energy, to
53:43eliminate price controls
53:45on natural gas and on oil,
53:47let the market work, and
53:49you would find the
53:51so-called energy problem
53:52would disappear faster
53:53than you could say James
53:55Schlesinger. Dr. Friedman,
54:08in a Newsweek article last
54:10month you stated that
54:11inflation in 1977 was
54:14higher than in 1976; also
54:18in 1978 it would be higher
54:20than in 1977. How much
54:22higher will it be and when
54:23will it stop going up?
54:28The easy questions we
54:29answer at once; the difficult
54:32take a little longer. It's not
54:39too hard to say where
54:40inflation will be in 1978
54:45because that's already
54:46largely determined. The
54:48rate of inflation in any
54:49year is largely a function
54:51of what happened to the
54:52quantity of money two
54:53years earlier--not
54:55entirely but largely. So
54:58we can already say what's
54:59in store for us, and I have
55:02estimated that something
55:03like a 7 to 9 percent rate
55:05of inflation is what's
55:06probably in store for us
55:08in 1978. Where it will go
55:12beyond that in 1979, it
55:15will be somewhere in that
55:18range but how much higher
55:19it will go depends on the
55:20policies that are followed
55:21from here on out. All of
55:24this is not predetermined;
55:27we have a choice about the
55:30course of events. In my
55:32own opinion the likelihood
55:35is that sometime in the
55:37next two or three years
55:40inflation is likely to get
55:41up to 10 or more percent.
55:47Where we will go from
55:50there on out is more
55:51complicated. What has
55:53happened in fact over the
55:56last several decades is
55:59that we have been on a
56:00roller coaster. Inflation
56:03rates have risen; when
56:04they get up to a high
56:05enough point there's great
56:06public pressure to bring
56:07them down, they are
56:08brought down, then there's
56:09a great excitement about
56:11recession and
56:12unemployment, and they are
56:13brought up again. But each
56:14peak is higher than the
56:15preceding peak, and each
56:17trough is higher than the
56:19preceding trough. Now
56:21we're on the upgrade of
56:22one of those roller
56:24coasters. The preceding
56:26peak was up around 11 or
56:2812 percent. If history
56:29continues to repeat
56:30itself, the next peak will
56:32be higher than that.
56:33Sooner or later the public
56:36will demand that it be
56:37stopped, and when that
56:39happens it will be stopped
56:40because inflation is a
56:43disease that we know how
56:44to cure. What's needed is
56:46not the knowledge; it's
56:47the will. It's the
56:49political will and
56:50willingness to take the
56:50measures that are
56:51necessary to stop it. Now
56:54again, don't misunderstand
56:55me. Inflation is not
56:56produced by evil people;
56:58it's produced by you and
56:59me. It's produced by
57:01exactly the same political
57:03forces that have sent our
57:04government spending
57:05skyrocketing. It's because
57:07we say to government, "We
57:08want you to spend more and
57:09more, but we don't want
57:11you to tax more and more."
57:13So Congress listens, it
57:14spends more, it doesn't
57:15tax more, and it pays for
57:16the difference by printing
57:18money. And that's why we
57:19have the inflation.
57:26I'm a free enterpriser I
57:31feel. I find income tax
57:34totally antagonistic to
57:38true free enterprise. Can
57:39we run the country without
57:42income tax? There's a
57:43sense in which all taxes
57:45are antagonistic to free
57:46enterprise and yet we need
57:49taxes. We have to
57:52recognize that we must not
57:57hope for a utopia that is
57:58unattainable. I would like
58:01to see a great deal less
58:02government activity than
58:03we have now, but I do not
58:07believe that we can have a
58:10situation in which we
58:11don't need government at
58:12all. We do need to provide
58:15for certain essential
58:16government functions--the
58:17police function, the
58:19national defense function,
58:22the function of preserving
58:23law and order, of
58:24maintaining a judiciary.
58:26So the question is, which
58:28are the least bad taxes?
58:31In my opinion, and this
58:35may come as a shock to
58:36some of you, the least bad
58:39tax is the property tax on
58:42the unimproved value of
58:43land, the Henry George
58:44argument of many, many
58:46years ago. The next least
58:49bad tax is a flat-rate tax
58:51on income above an
58:52exemption. So in answer to
58:55your question, if I could
58:56design my ideal tax system
58:58it would contain an income
58:59tax, but it would not be
59:01the kind of monstrosity we
59:02have now. It would be a
59:05flat-rate tax on all
59:08income, from whatever
59:09source derived, less only
59:13a personal deduction and
59:14strict occupational
59:16expense, and that kind of
59:18income tax I think would
59:20be the least inconsistent
59:22with a strong free
59:23enterprise system. You
59:29know it's an interesting
59:30thing, if you're talking
59:31about taxes, about why it
59:32is that the property tax
59:34is so unpopular. It's not
59:36unpopular for good
59:37economic reasons. It's
59:39unpopular in my opinion
59:40for one simple reason:
59:42it's the only tax left on
59:44the books for which people
59:45have to write a big check.
59:49The income tax is a far
59:51worse tax but--and I have
59:54to admit that I have some
59:55part of the guilt in this
59:57process because during
59:58World War II I worked at
59:59the Treasury and helped to
1:00:00design the withholding
1:00:02system; my wife has never
1:00:04forgiven me for it, but with
1:00:09respect to the income tax
1:00:11we have arranged it so that
1:00:13it's taken off bit by bit,
1:00:14and it's almost painless.
1:00:17With respect to the sales
1:00:18tax, we pay a little bit
1:00:20of it each time. With
1:00:21respect to the corporate
1:00:23tax and excise taxes, they
1:00:24are hidden in the price of
1:00:26things we buy; we don't
1:00:26even know we're paying
1:00:27them. But with respect to
1:00:30the property tax, that
1:00:31remains a tax that we as
1:00:33individuals have to pay
1:00:34and that we have to write
1:00:35a big check for. That's
1:00:38the fundamental reason in
1:00:40my opinion why it's so
1:00:41unpopular. In fact--I hate
1:00:43to say this because it's
1:00:45giving hostages to
1:00:46fortune--if you wanted to
1:00:48reduce the unpopularity of
1:00:50the property tax, the way
1:00:51to do it would simply be
1:00:52to provide for an
1:00:53effective method whereby
1:00:55it could be withheld at
1:00:56source in small payments
1:00:58and that would eliminate a
1:00:59large part of the
1:01:00objection to it.
1:01:03Dr. Friedman, in light of
1:01:05the current farmers' strike
1:01:07for higher farm price
1:01:08supports and the complaint
1:01:11that they are going broke,
1:01:13can you offer any comments
1:01:14on your opposition to any
1:01:16farm price supports? It's
1:01:19a very interesting sign of
1:01:21the change that has
1:01:22occurred in this country.
1:01:23The farmers have always
1:01:24complained, so have the
1:01:26rest of us, but the
1:01:28interesting change that
1:01:30impresses me is the change
1:01:31in the focus of their
1:01:32complaints. If you go back
1:01:34a century, to the farmer
1:01:37protest movements of the
1:01:38nineteenth century, the
1:01:40Greenback movement, it
1:01:42was always directed
1:01:43against Wall Street. The
1:01:47complaint was that the
1:01:48money-changers in the
1:01:49temple--the financial
1:01:50people, the people in Wall
1:01:51Street, the banks--were
1:01:53the ones who were forcing
1:01:56the farmers to pay high
1:01:57prices for what they
1:01:58bought and receive low
1:01:59prices for what they sold.
1:02:05But as we have shifted
1:02:06from a free enterprise
1:02:07society to a welfare
1:02:09state, the farmers no
1:02:10longer complain about Wall
1:02:12Street; I haven't heard a
1:02:13single complaint from them
1:02:14about Wall Street. Now
1:02:15it's Washington they
1:02:16complain about. Of course
1:02:21the farmers have many
1:02:22complaints, so do the rest
1:02:23of us, but in my opinion
1:02:26there is no justification
1:02:28whatsoever for any
1:02:30government involvement in
1:02:31the pricing of farm
1:02:32products either up or
1:02:34down. The pricing of farm
1:02:38products ought to be
1:02:39determined in the market
1:02:40as should other prices.
1:02:43The farmers, like the rest
1:02:45of us, regard anything
1:02:48good that comes along as
1:02:50only their just due and so
1:02:53a few years back when farm
1:02:55prices were very high and
1:02:57farm incomes were higher
1:02:58than they had ever been in
1:03:00recorded memory, I didn't
1:03:01hear of any farm strikes
1:03:03against those high prices.
1:03:06I didn't hear of any
1:03:09voluntary action by
1:03:11farmers to pay extra taxes
1:03:13because their incomes were
1:03:15higher. Well, you've got
1:03:17to take the good with the
1:03:18bad. The farming business
1:03:22is a very large-scale
1:03:24capitalist business in
1:03:25these days with a wide
1:03:27range of incomes. It's
1:03:28going to be good some
1:03:29years; it's going to be
1:03:30bad some years. A free
1:03:33enterprise system is a
1:03:34profit and loss system,
1:03:36and never forget the loss
1:03:37part. If you have a system
1:03:40in which losses are
1:03:41eliminated, you will
1:03:42eliminate the heart of a
1:03:44free enterprise system
1:03:46which is to make people
1:03:47responsible for their own
1:03:48actions and to provide a
1:03:50system under which they
1:03:52are induced to use their
1:03:53resources effectively,
1:03:55under which if they engage
1:03:56in bad ventures they get
1:03:57out. That's the
1:03:59fundamental difference
1:04:00between the market and
1:04:02government. When
1:04:03government engages in a
1:04:04losing venture, you know
1:04:06what happens. It gets
1:04:07doubled in size. But in a
1:04:14market system if somebody
1:04:15engages in a losing
1:04:17venture, he has to go out
1:04:18of business. That's more
1:04:20important really than the
1:04:21profit side in my opinion.
1:04:23Well, that applies equally
1:04:24to the farmers so I do not
1:04:26see any justification. But
1:04:28more important, suppose
1:04:30they got their way. We've
1:04:33been down that road
1:04:34before. What does it lead
1:04:35to? It leads to government
1:04:38control over agriculture.
1:04:40If the government is going
1:04:41to set the price, if that
1:04:43price is higher than the
1:04:44market price, then you
1:04:46either accumulate stocks
1:04:49as we did at one time or
1:04:52else you have compulsory
1:04:54reductions in acreage and
1:04:56production by the farmers
1:04:58and they will complain
1:04:59about that. I want to say
1:05:01one other thing of a very
1:05:02different kind. I believe
1:05:05that the farm protest has
1:05:07been enormously
1:05:08exaggerated in the news
1:05:09media in terms of where it
1:05:11comes from and what it
1:05:12means. You have a very
1:05:14small fraction of the farm
1:05:16population that is
1:05:17engaging in this. The
1:05:18major farm organization of
1:05:20this country, the Farm
1:05:21Bureau Federation, to my
1:05:23knowledge has not
1:05:24participated in these
1:05:25strikes. What you have is
1:05:31a rather small marginal
1:05:33group of farmers who have
1:05:35been able to get a great
1:05:36deal of media attention by
1:05:38engaging in all sorts of
1:05:45picturesque events such as
1:05:47lining up tractors and
1:05:49driving them around
1:05:50Plains, Georgia.
1:05:52Dr. Friedman, you have
1:05:53been quoted as saying the
1:05:55Social Security tax is the
1:05:56worst tax on the books and
1:05:57that in your opinion it
1:05:59should be abolished--the
1:05:59whole system. What would
1:06:01you suggest to use as a
1:06:02substitute in its place?
1:06:08There are different levels
1:06:09on which that question can
1:06:10be answered: one, dealing
1:06:15with the Social Security
1:06:16system as a whole; the
1:06:17second, dealing simply
1:06:18with the financing of
1:06:20present Social Security
1:06:22benefits, so-called,
1:06:24without going into the
1:06:25question of whether those
1:06:26benefits themselves should
1:06:27be changed. Let me limit
1:06:29the question to that
1:06:30second level. Here again
1:06:33is another case where I
1:06:34believe the fiscal
1:06:35conservatives have been on
1:06:36the wrong side of the
1:06:37issue. The fiscal
1:06:39conservatives have tended
1:06:41to support the payroll tax
1:06:44and matching the payroll
1:06:45tax to expenditures. They
1:06:47have tended to support the
1:06:48notion that the Social
1:06:50Security system should be
1:06:51self-financing. In so
1:06:54doing they have been
1:06:55supporting a fiction. The
1:06:57Social Security system is
1:06:58not in any relevant sense
1:07:00an insurance system. The
1:07:02taxes that people are
1:07:03paying under the Social
1:07:04Security system are not in
1:07:06any relevant sense
1:07:08financing the benefits
1:07:09they themselves will
1:07:10ultimately receive. The
1:07:12Social Security system is
1:07:13a combination of a bad tax
1:07:16and a bad expenditure
1:07:18program. I have never
1:07:19heard anybody who would
1:07:20defend either half
1:07:21separately, and taking two
1:07:23bad things and putting
1:07:24them together doesn't
1:07:25generally make something
1:07:26good out of it. Alright
1:07:29now, by supporting the
1:07:33notion of these two being
1:07:35self-financing, the fiscal
1:07:37conservatives have in fact
1:07:39tended to support the
1:07:40fiction that this is
1:07:43really an insurance
1:07:44scheme. It's not an
1:07:46insurance scheme at all.
1:07:47What it is is a scheme
1:07:48whereby people today are
1:07:50paying taxes today to
1:07:52provide payments and
1:07:54benefits to other people
1:07:55today. There is a small
1:07:58relationship between the
1:07:59amount beneficiaries
1:08:00receive and the amount
1:08:01they themselves pay, but
1:08:03that relationship is very
1:08:04small. Insofar as there is
1:08:07that relationship, you can
1:08:08justify an element of
1:08:11payroll tax; but insofar
1:08:13as a large part of Social
1:08:15Security benefits are
1:08:16properly to be understood
1:08:18as subsidies, welfare
1:08:20payments, there is no
1:08:21justification for
1:08:22financing them out of a
1:08:23payroll tax. In my opinion
1:08:28if you are going to
1:08:29finance them, they should
1:08:31come out of federal
1:08:32revenues. Now you will say
1:08:34to me, "Oh my, but that's
1:08:35terrible. Does that mean
1:08:37that you're supposing that
1:08:38we should increase other
1:08:39taxes?" No. Let me go back
1:08:43to the fundamental
1:08:44principle. Government is
1:08:45going to spend whatever
1:08:46the tax system will raise
1:08:48plus a little more--lately
1:08:50a good deal more. The only
1:08:52effective way to keep down
1:08:54government spending is to
1:08:55keep down the amount
1:08:56of money available to
1:08:57government to spend. There
1:08:58is no other way you can do
1:08:59it. The effect of linking
1:09:03Social Security, of having
1:09:05the payroll tax, and of
1:09:09spreading the notion that
1:09:11somehow or other the
1:09:13payroll tax is related to
1:09:14the benefits--the effect
1:09:16of that has been to make
1:09:17the American people
1:09:18willing to bear a larger
1:09:19tax load than they
1:09:20otherwise would bear. I
1:09:23argue the other way;
1:09:25reduce taxes whenever you
1:09:26can. Remember my main
1:09:29point that the deficit is
1:09:30not the thing to worry
1:09:31about. What you want to
1:09:33worry about is total
1:09:34spending. If you reduce
1:09:38the payroll tax and throw
1:09:40the burden on the general
1:09:41tax level, that will be
1:09:42the only effective way of
1:09:44stopping even worse
1:09:45programs. After all you
1:09:48have had a strong movement
1:09:49for a long time for a
1:09:50national health program
1:09:51which would be a disaster.
1:09:54It would mean worse
1:09:55medical care and more
1:09:56expensive medical care for
1:09:57the American people. What
1:09:59has been preventing that
1:10:00from being enacted? Only
1:10:02the difficulty of
1:10:03financing it. Let the
1:10:06fiscal conservatives join
1:10:07in making the payroll tax
1:10:09more acceptable and making
1:10:10the payroll tax higher,
1:10:11and you will be providing
1:10:12the financing mechanism
1:10:14for national health
1:10:15service. Instead, lower
1:10:18the payroll tax, throw
1:10:21this on the general
1:10:22revenue, and you will be
1:10:23taking away the revenue
1:10:24base for programs of that
1:10:26kind. So where are you
1:10:28going to finance it? By
1:10:30not adopting bad
1:10:31government spending
1:10:32programs. That's where I'm
1:10:33going to finance it, and
1:10:34that's where-not, I, I
1:10:36don't mean personally--the
1:10:37political pressures, the
1:10:40realities of the political
1:10:42mechanism, will finance
1:10:43it. And as I say, it's
1:10:46again another example of
1:10:47the way in which the
1:10:49actual effect of measures
1:10:50that people have been
1:10:51taking have been very
1:10:52different from those they
1:10:53intended to take. I wanted
1:10:57to see what you think
1:10:58about this suggestion for
1:11:00focusing public debate
1:11:02more into the free
1:11:03enterprise area and your
1:11:05agent of enterprise
1:11:06and that sort of thing. Up
1:11:09until now stockholders and
1:11:10corporations have been
1:11:11rather unorganized. They
1:11:13have not spoken in a loud
1:11:15voice and have not even
1:11:16had any mechanism. Do you
1:11:20have any ideas of how
1:11:21stockholders could be
1:11:23mobilized a little more,
1:11:24could open up their
1:11:25meetings to more debates
1:11:27of issues that would be
1:11:28relevant to improving the
1:11:30enterprise system, toward
1:11:32making an election of
1:11:33directors a function of
1:11:35how directors promote
1:11:37proficiency, economy, and
1:11:39less burden on the
1:11:41stockholders? Frankly, my
1:11:45answer to that is that
1:11:46stockholders are citizens,
1:11:48that they should express
1:11:49their values in this sense
1:11:52as individual citizens. I
1:11:54do not believe that
1:11:56businesses are either a
1:11:59proper means for shaping
1:12:02public policy qua
1:12:03businesses or an effective
1:12:06means. You talk about
1:12:08preserving the free
1:12:09enterprise system. Who has
1:12:10been destroying it? The
1:12:14business community must
1:12:15take a large share of the
1:12:16responsibility. I am going
1:12:23off my topic for tonight,
1:12:25but you must separate out
1:12:28being pro-free enterprise
1:12:29from being pro-business.
1:12:32The two greatest enemies of
1:12:33the free enterprise system
1:12:34in my opinion have been on
1:12:36the one hand my fellow
1:12:37intellectuals and on the
1:12:39other the big
1:12:40businessmen--for opposite
1:12:42reasons. My fellow
1:12:44intellectuals are all in
1:12:45favor of freedom for
1:12:46themselves. After all if I
1:12:49say to them, "You know
1:12:51it's terribly wasteful to
1:12:53have ten people do
1:12:54research on the same
1:12:55topic. Don't you think we
1:12:57ought to have a government
1:12:58planning bureau that would
1:12:59assess the priority of
1:13:01various research projects
1:13:02and decide who should
1:13:03undertake them so we could
1:13:05eliminate these terrible
1:13:06wastes of competition?"
1:13:09They will say to me, "Why,
1:13:10don't you understand the
1:13:11process of scientific
1:13:12research? Don't you
1:13:13understand the necessity
1:13:14for academic freedom, for
1:13:17allowing people to choose
1:13:18their own subjects?" Of
1:13:19course I do understand it
1:13:20and I agree with that, but
1:13:22when they come to the rest
1:13:25of the community it's
1:13:26different: it's terribly
1:13:27wasteful to have four gas
1:13:29stations on four corners;
1:13:30we ought to have a
1:13:31government bureau that
1:13:32eliminates that
1:13:33overlapping competition,
1:13:35that assigns priorities,
1:13:36and sees to it that things
1:13:38are done right. So the
1:13:40intellectual is all in
1:13:41favor of freedom for
1:13:42himself and all opposed to
1:13:44it for everybody else.
1:13:46The businessman is very
1:13:47different. I don't mean to
1:13:52be talking about all of
1:13:54them but I'm talking about
1:13:56a very large fraction of
1:13:57them. You cannot get them
1:13:58on a podium without them
1:13:59uttering generalities
1:14:01about the desirability of
1:14:02free enterprise systems,
1:14:05but when I come to their
1:14:06own business that's
1:14:07something else. When the
1:14:09head of U.S. Steel talks
1:14:10about free enterprise, he
1:14:13doesn't mean free
1:14:14enterprise for steel. Oh
1:14:16no, he wants the
1:14:17government to step in and
1:14:18protect him from
1:14:19competition, from those
1:14:20Japanese who are
1:14:21undercutting him. When the
1:14:23oil industry talks about
1:14:25wanting a free market,
1:14:27some years ago they
1:14:28weren't talking about
1:14:29freedom. They wanted
1:14:30percentage depletion, they
1:14:31wanted oil import quotas,
1:14:33they wanted the Railroad
1:14:35Commission to proration
1:14:37oil. When bankers stand up
1:14:40on a platform and talk
1:14:41about the great
1:14:42desirability of free
1:14:43enterprise and of free
1:14:44markets, and I say to
1:14:45them, "You mean you don't
1:14:47want the government to
1:14:48limit the amount of
1:14:49interest that you are
1:14:50required to pay on demand
1:14:51deposits? You want to have
1:14:53free competition." "Oh,"
1:14:54they say, "that's
1:14:55different. We like that."
1:14:59So almost every
1:15:00businessman is in favor of
1:15:02free enterprise for
1:15:03everybody else, but
1:15:04special privilege and
1:15:05special government
1:15:06protection for himself. As
1:15:09a result they have been a
1:15:11major force in undermining
1:15:14a free enterprise system.
1:15:18So that in any hope that
1:15:19you're going to protect a
1:15:20free enterprise system, do
1:15:22you really mean to say
1:15:23that you expect U.S. Steel
1:15:26stockholders to
1:15:27propagandize for free
1:15:28trade? Is that what
1:15:31you expect? Don't
1:15:33misunderstand me. I don't
1:15:35blame the executives of
1:15:38U.S. Steel for trying to
1:15:40get limitations on imports
1:15:44or the executives of some
1:15:45other corporations for
1:15:46trying to get tariffs.
1:15:47They are doing what they
1:15:49were hired to do. They
1:15:51were hired to make money
1:15:52for their stockholders,
1:15:54and they're trying to do
1:15:55it. If the rest of us are
1:15:58such fools as to let them
1:16:00make money by getting
1:16:02tariffs or by getting
1:16:04import quotas or by
1:16:05getting other provisions,
1:16:06then we're the ones to
1:16:07blame not they. But stop
1:16:10kidding yourself into
1:16:11thinking that you can use
1:16:12the business community as
1:16:14a way to promote free
1:16:17enterprise. Unfortunately
1:16:19most of them are not our
1:16:22friends in that respect.
1:16:23Now I want to make an
1:16:24important distinction, and
1:16:25that's between the
1:16:27large-scale corporations
1:16:29and small business. The
1:16:32only major business
1:16:33organization in this
1:16:34country that is almost
1:16:35consistently on the right
1:16:36side, from my point of
1:16:38view as a believer in free
1:16:39enterprise, is the
1:16:40National Federation of
1:16:41Independent Businessmen.
1:16:46NAM, the Chamber of
1:16:49Commerce, the CED--I can't
1:16:51predict on which side
1:16:52they'll be. They may be on
1:16:53the right side or they may
1:16:54be on the wrong side, but
1:16:57the small businessman is
1:16:58on the right side. Now
1:16:59that isn't because the
1:17:00small businessman is any
1:17:01nobler, any more ethical,
1:17:03any more moral. It's for
1:17:05two different reasons.
1:17:06It's because first of all
1:17:07he is spending his own
1:17:08money and not somebody
1:17:09else's, but second it's
1:17:11because he knows he can't
1:17:12be effective in government
1:17:14and therefore it's in his
1:17:15self-interest to be for
1:17:17the right thing. Again I'm
1:17:19not decrying that; I'm
1:17:20only describing it. Again,
1:17:22let me emphasize, there
1:17:23are some great exceptions.
1:17:25There are some businessmen
1:17:28who in their capacity as
1:17:30businessmen have been
1:17:32staunch defenders of free
1:17:33enterprise. I don't mean
1:17:35to say there haven't been
1:17:36any exceptions. But do not
1:17:38kid yourself in thinking
1:17:39that the corporation as
1:17:41such is a channel that
1:17:43anybody is going
1:17:44effectively to use to
1:17:46promote free enterprise
1:17:47ideas. Dr. Friedman, do
1:17:55you believe that we ought
1:17:56to have an audit of the
1:17:58gold in Fort Knox and also
1:18:00the Federal Reserve
1:18:01System? No, I believe we
1:18:02ought to sell off the gold
1:18:03in Fort Knox at a public
1:18:05auction at the highest
1:18:06price we can get. I do not
1:18:08see any reason why the
1:18:09storage of gold should be
1:18:10a nationalized industry. I
1:18:13believe private people
1:18:15should be free to own gold
1:18:17to do whatever they want
1:18:19with it. I do not see any
1:18:20more justification for the
1:18:23U.S. government having a
1:18:24large stock of gold in
1:18:25Fort Knox than for its
1:18:26having a large stock of
1:18:28copper or steel or other
1:18:29things. You might justify
1:18:31a small strategic reserve
1:18:33in order to be able to
1:18:34have something that we
1:18:35could use to bribe some
1:18:36people in Africa or Asia
1:18:37if the time emerges, but
1:18:39beyond that use for gold I
1:18:41see no justification.
1:18:43Don't kid yourself in
1:18:44thinking that we're going
1:18:45to have a gold standard
1:18:45again. My remarks are not
1:18:48to be interpreted as
1:18:49saying that an
1:18:52honest-to-God gold
1:18:53standard might not be a
1:18:54good thing; it might be.
1:18:56The kind of gold standard
1:18:57we had in the nineteenth
1:18:58century had something to
1:18:59be said for it, but we
1:19:01haven't had that kind of
1:19:02gold standard since 1914
1:19:04and we aren't about to
1:19:05have it again. Therefore,
1:19:08in my opinion, the right
1:19:09thing to do with the gold
1:19:10in Fort Knox is to auction
1:19:12it off to the highest
1:19:13bidder. Maybe we ought to
1:19:15do it over a three- or
1:19:16four-year period in order
1:19:17not to spoil the market,
1:19:20but other than that that's
1:19:21what we ought to do. And
1:19:22do you believe we ought to
1:19:24have an audit of the
1:19:25Federal Reserve System?
1:19:26You can have lots of
1:19:28audits of the Federal
1:19:29Reserve System. You know
1:19:29if you are going to ask me
1:19:30about the Federal Reserve
1:19:31System, my ultimate
1:19:32solution is to abolish it
1:19:35and that would eliminate
1:19:36the necessity for an
1:19:37audit. But that isn't
1:19:40going to happen tomorrow;
1:19:42it isn't going to happen
1:19:43the next day. The problem
1:19:44with the Federal Reserve
1:19:45System is not that it
1:19:46needs auditing. The
1:19:48problem with the Federal
1:19:49Reserve System is that it
1:19:51is following the policy
1:19:54which Congress imposes on
1:19:55it, and in my opinion what
1:19:59we want is not a more
1:20:00independent Federal
1:20:01Reserve System; what we
1:20:03want is to require
1:20:07Congress to be responsible
1:20:10for setting forth more
1:20:11specific rules for the
1:20:12conduct of monetary
1:20:14policy. Now you're getting
1:20:15into a very broad and
1:20:16difficult issue and I warn
1:20:19you that what I'm saying
1:20:20now are statements that
1:20:22you could not possibly
1:20:23accept on faith, but that
1:20:26they are statements that
1:20:27are based on a good deal
1:20:28of thought and
1:20:29consideration. But I
1:20:30believe we need a more
1:20:31responsible monetary
1:20:32policy and I do not
1:20:34believe that an audit of
1:20:36the Federal Reserve System
1:20:37would in any way
1:20:38whatsoever contribute to
1:20:40that more responsible
1:20:41policy.

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