Why People Choose More Government Rather Than More Liberty

by Burt on May 12, 2011

We all know that some taxes are necessary. We need to support national defense, we need to provide for our legislators, and we need to pay for a court system to enforce the laws of the land. But subsidies to farmers, payments to college students, and government aid for electric cars and green energy force the rest of us to pay higher taxes for these programs that mainly help targeted groups of voters.

But more than this, high tax rates discourage investment by creating incentives to shelter wealth, hide it, convert it to gold, or take it out of the country. When that happens, we become a poorer nation.

Here is one example from the 1920s. Under Presidents Harding and Coolidge, tax rates on the rich were slashed from 73 to 25%. In the mid-1920s, with more money to invest, Willis Carrier began selling his air conditioning inventions–first to movie theatres and then to factories. Also in the mid-1920s, with more money to invest, B. F. Goodrich made the first large-scale purchase of zippers, perfected by Gideon Sundback, to use on women’s boots. Air conditioners and zippers were invented before the 1920s, but only with the lower tax rates did the investors decide to take the risks to sell those products. Americans, especially in southern cities such as Atlanta and Houston, were blessed by air-conditioning and Americans all over the country were blessed by having more convenient zippers instead of buttons on their clothes. And the jobs created by air-conditioning, zippers, and other innovations made the U. S. the industrial capital of the world.

Why is such an obviously successful economic system so hard to maintain? Because the results are unpredictable and therefore appear almost accidental. President Coolidge, for example, never said, “If the U. S. cuts tax rates, someone will emerge who will build a workable air-conditioner and a functioning zipper. Just you wait and see.” Instead, Coolidge cut tax rates knowing that more liberty would create more incentives for Americans to tinker and invent useful products that would create more jobs and prosperity for Americans and for the world. Willis Carrier and Gideon Sundback were just two of the people to use their increased liberty to make products that would change the lives of most Americans.

During the Great Depression, Franklin Roosevelt raised tax rates back to over 70% on the rich. Not only did most of his programs not work, as I show in New Deal or Raw Deal?, but the high tax rates stifled invention and industrial expansion all over America. By 1938, unemployment had dropped to 11% in most of Europe, but it was still 19% in high-tax America. The developers of television and xerox machines were working on their inventions in the 1930s, but these inventors and others could not raise capital in the hostile investment environment of the 1930s–Americans would have to wait until later to enjoy these new products.

Just as Coolidge could not say, “Please cut tax rates and I will give you air-conditioners and zippers,” so the opponents of FDR could not say, “If you vote for Roosevelt and high taxes, you won’t get to watch his inaugural on television or copy his State of the Union address on a xerox machine.” People didn’t know what inventions they were missing (or at least delaying) by voting for high taxes with FDR, and they didn’t know what new products they were going to get with Coolidge and low taxes. Therefore, a politician who promises a federal subsidy for, say, farmers has a built in constituency to give him votes, but the larger constituency that has to pay higher taxes is often indifferent because it never knows what products are being delayed, or never invented, by trading a variety of federal subsidies for higher taxes.

The Founders recognized that when in doubt, side with liberty. They therefore made the functions of the federal government few and clearly defined. They gave us the material to build and maintain a great nation, if we do not lose too much of it.

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