The Free Market 24, no. 1 (January 2004)
The “Coalition Provisional Authority” (the US government) in Iraq has instituted a 15 percent tax in Iraq based on the view that “these collections are for the benefit of the Iraqi people.” The US will tax income, the transfer of “real property,” car sales, and gasoline. The US claims that this is a lower tax than Saddam had, but this is only true in the most technical legal sense.
The truth is that Iraqis paid no internal taxes under his regime. Many industries were nationalized and the oil revenue itself funded the regime, just as with many other governments in the region. For average Iraqis, even poorer than before, this represents an enormous tax increase, one imposed by martial law.
Of course there is no chance that the government can collect the tax, and thank goodness. It’s bad enough to live under foreign military occupation. But to have that same regime attempt to loot private property to fund the government is nothing short of ghastly. And yet the news gets worse: this tax is being celebrated by some members of the Supply-Side School of economics.
Austrians and Supply Siders have long been in agreement that taxes should be lower. But on the level of theory, a disagreement has long festered. The Supply Siders have emphasized how the right tax rate can be both encouraging of production and yield maximum revenue for the government.
Austrians have said that maximum revenue should not be the goal of tax policy; rather the best tax system is the one that does the least possible damage to the market economy. No tax encourages production. Even the best tax discourages production. Therefore, the economic ideal is zero taxes and the best possible tax reform is one that lowers any and all taxes as low as possible.
But Supply Siders reject this view. They hold the position that taxes are a positive good, provided that they are flat and simple, with no special deductions permitted. The usual rate they suggest is 15 percent. This was the position that Steve Forbes took when he ran for president some years ago, and it turned out to cost him dearly in the polls. Why? While the flat tax would mean lower tax for some, it would mean higher taxes for those who enjoy current deductions such as the child tax credit and the mortgage interest deduction. This seriously harmed Forbes’s presidential bid.
Fast forward to today, when Iraq has become the favorite playground of Washington conservatives, a place in which they can impose policies that have been resisted in the US due to political considerations. Yes, the setting is rather perverse. After all, the US caused far more damage to the country than Saddam would have ever gotten away with, and now presides over a level of political instability that rivals some of the worst civil unrest we’ve seen anywhere in the world in a century. So long as the US operates a militarized occupation government, such unrest will continue.
A host of absurdities have emerged. While invoking the classical liberal tradition, even the name Hayek, the neoconservatives are running a military dictatorship, confiscating weapons from the people, urging emigration barriers from neighboring states, censoring the press, imposing curfews, mandating ID cards, arresting and jailing people without trial, and imposing arbitrary violence. Elsewhere in this issue, D.W. MacKenzie discusses the case of the imposition of a phone monopoly.
It is in the Iraqi tax system that imperialism and Supply-sideism meet. How did Supply Siders respond to the news of the new flat tax in Iraq? “It’s extremely good news,” Grover Norquist told the Washington Post. Bruce Bartlett added: “It is gratifying.” Amity Shlaes, who wrote a good book on the evil of taxes only last year, said: “Such low rates will put Iraq on par with Hong Kong.”
These comments may seem like they come from another planet, but what they reveal is the willingness of this crowd to press onward with the imposition of their abstractions while completely disregarding the existing realities. It is not just theory gone mad; it is bad theory gone mad. Even if the tax were enforceable, it can only harm production in a country that is already suffering beyond comprehension.
But let us at least assume that these Supply Siders are sincere, that they really believe that imposing a tax of this sort is good for Iraq. It puts in very sharp relief their fundamental error of believing that a tax can be neutral to the market so long as it is flat and low (though low is a relative term; the founding fathers overthrew British rule for far less).
Taxes are just another word for property confiscation. They forcibly take from some and give to others, and always and everywhere represent a violent imposition on the market. In a country already rife with violence, taxes are not advisable in any sense.
Making matters even more grotesque, the tax is not applicable to the government, the military running the country, the government contractors and subcontractors, or any goods and services used or imported even for nonofficial uses. In short, it is an undisguised attempt to loot the population for the benefit of the ruling elite, and a clear act of despotism.
In any case, with the Bush administration demanding billions upon billions to run the occupation, one might think that the US in Iraq is well funded enough, and would not need additional revenue. And wasn’t this the regime that claimed it could fund itself out of oil revenue, and pay for the entire reconstruction this way in addition? Of course this can’t happen so long as the government can’t get the oil production and distribution system up and working.
Austrians and Supply Siders have worked together for a very long time on their points of agreement. But there comes a time when even the smallest difference in theory turns out to have a huge impact in practice. We can think of many issues that fall into such a category. The imposition of a flat tax on Iraq is one of those. The Supply Siders have finally found their playground, and they turn out to be the biggest bullies of all.
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Llewellyn H. Rockwell, Jr., is president of the Mises Institute and editor of LewRockwell.com (rockwell@mises.org).
