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Mises on the public sector as “tax eaters” who “feast” on the assets of the ordinary tax payer (1953)

In a similar fashion to John C. Calhoun’s division of the world into net “tax-consumers” and net “tax-payers”, the Austrian economist Ludwig von Mises (1881-1973) distinguished between the ordinary citizens who paid taxes and the public sector entities like the New York subway which “consumed” the taxes paid by the former. This is a classic example of what Mises in 1945 termed “the clash of group interests”:

The financial embarrassment of the main European countries is predominantly caused by the bankruptcy of the nationalized public utilities. The deficit of these enterprises is incurable. A further rise in their rates would bring about a drop in total net proceeds. The traffic could not bear it. Daily experience proves clearly to everybody but the most bigoted fanatics of socialism that governmental management is inefficient and wasteful. But it is impossible to sell these enterprises back to private capital because the threat of a new expropriation by a later government would deter potential buyers.

In a capitalist country the railroads and the telegraph and telephone companies pay considerable taxes. In the countries of the mixed economy, the yearly losses of these public enterprises are a heavy drain upon the nation’s purse. They are not taxpayers, but tax-eaters.

Under the conditions of today, the nationalized public utilities of Europe are not merely feasting on taxes paid by the citizens of their own country; they are also living at the expense of the American taxpayer. A considerable part of the foreign-aid billions is swallowed by the deficits of Europe’s nationalization experiments…

Derailment of State Railroads

The financial embarrassment of the main European countries is predominantly caused by the bankruptcy of the nationalized public utilities. The deficit of these enterprises is incurable. A further rise in their rates would bring about a drop in total net proceeds. The traffic could not bear it. Daily experience proves clearly to everybody but the most bigoted fanatics of socialism that governmental management is inefficient and wasteful. But it is impossible to sell these enterprises back to private capital because the threat of a new expropriation by a later government would deter potential buyers.

In a capitalist country the railroads and the telegraph and telephone companies pay considerable taxes. In the countries of the mixed economy, the yearly losses of these public enterprises are a heavy drain upon the nation’s purse. They are not taxpayers, but tax-eaters.

Under the conditions of today, the nationalized public utilities of Europe are not merely feasting on taxes paid by the citizens of their own country; they are also living at the expense of the American taxpayer. A considerable part of the foreign-aid billions is swallowed by the deficits of Europe’s nationalization experiments. If the United States had nationalized the American railroads, and had not only to forgo the taxes that the companies pay, but, in addition, to cover every year a deficit of several billions, it would not have been in a position to indemnify the European countries for the foolishness of their own socialization policies. So what is postponing the obvious collapse of the Welfare State in Europe is merely the fact that the United States has been slow and “backward” in adopting the principles of the Welfare State’s “new economics”: it has not nationalized railroads, telephone, and telegraph.

Yet Americans who want to study the effects of public ownership of transit systems are not forced to visit Europe. Some of the nation’s largest cities—among them Detroit, Baltimore, Boston, San Francisco—provide them with ample material. The most instructive case, however, is that of the New York City subways.

New York City subways are only a local transit system. In many technological and financial respects, however, they surpass by far the national railroad systems of many countries. As everybody knows, their operation results every year in a tremendous deficit. The financial management accumulates operating deficits, planning to fund them by the issuance of serial bonds. Only a municipality of the bigness, wealth, and prestige of New York could venture on such a policy. With a private corporation financial analysts would apply a rather ugly word to its procedures: bankruptcy. No sane investor would buy bonds of a private corporation run on such a basis.

Incorrigible socialists are, of course, not at all alarmed. “Why should a subway pay?” they are asking. “The schools, the hospitals, the police do not pay; there is no reason why it should be different with a transit system.” This “why” is really remarkable. As if the problem were to find an answer to a why, and not to a wherefrom.

There is always this socialist prepossession with the idea that the “rich” can be endlessly soaked. The sad fact, however, is that there is not enough left to fill the bottomless barrels of the public treasury. Precisely because the schools, the hospitals, and the police are very expensive, the city cannot bear the subway deficit. If it wants to levy a special tax to subsidize the subway, it will have to tax the same people who are supposed to profit from the preservation of the low fare.

The other alternative is to raise the fare from the present [1953] level of ten cents to fifteen cents.* It will certainly be done. And it will certainly prove insufficient. After a while a rise to twenty cents will follow—with the same unfavorable result. There is no remedy for the inefficiency of public management. Moreover there is a limit to the height at which raised rates will increase revenue. Beyond this point further rises are self-defeating. This is the dilemma facing every public enterprise.

About this Quotation:

A recurrent theme in classical liberal thought both in Europe and America is the notion that those who benefit from taxes, whether by working for the state or receiving state funded subsidies and grants, form a separate group with distinct interests from those who pay the taxes from their earnings or savings. In the 19th century James Mill (the father of John Stuart) distinguished between those who “pillage” and those who are “pillaged” and this idea was an important component in the political thought of the “philosophic radicals”. The English radical John Wade made this idea a key part of his analysis in his Black Book in which he listed all the beneficiaries of government subsidies in Britain in the 1820s and 1830s. In a cartoon which accompanied the 1835 edition he showed Gulliver (as the British taxpayer) bound and tied on the ground by government officials and tax recipients (as the Lilliputians) who rifle his pockets. Another depiction of this same idea was provided by the French cartoonist and caricaturist Honoré Daumier in “Gargantua” (1831) in which King Louis Philippe is shown as a classic example of the “tax eating” ruler. By the 1840s the French liberal political economist Frédéric Basiait (1801-1850) had developed these ideas into a more sophisticated analysis of what he termed “legal plunder.” His planned “History of Plunder” never eventuated because of his premature death in 1850. All we have is a sketch of what he planned to write on this interesting topic. On the other side of the Atlantic the Southern agrarian Jeffersonian republican John C. Calhoun (1782-1850) concluded in a very similar fashion in his Disquisition on Government (1843-1848) that “the necessary result, then, of the unequal fiscal action of the government is, to divide the community into two great classes; one consisting of those who, in reality, pay the taxes, and, of course, bear exclusively the burthen of supporting the government; and the other, of those who are the recipients of their proceeds, through disbursements, and who are, in fact, supported by the government; or, in fewer words, to divide it into tax-payers and tax-consumers.”

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