Government: Club or Prison?

A recent post of mine over on the Blog at Mises.org:

Government: Club or Prison?
Jim Fedako

Does government function as a club or a prison? In particular, are local taxing districts — local governmental entities — simply clubs where residents voluntarily pay fees set by an elected board? Or, are these districts nothing more than prisons, so to speak, where the governing body extracts fines and penalties from land and labor? First, let us look at unions and monopolies.

It is customary to characterize traditional labor-union policies as monopolistic schemes aiming at the substitution of monopoly wage rates for competitive wage rates. However, as a rule labor unions do not aim at monopoly wage rates. A union is intent upon restricting competition on its own sector of the labor market in order to raise its wage rates. But restriction of competition and monopoly price policy must not be confused.

In the quote above, Mises distinguishes the union from the monopoly. While both seek to obtain advantages in the market, the monopoly is concerned with each good, whether sold or unsold. The union, on the other hand, cares only about members covered by its contract. Those unemployed are not its concern whatsoever. In other words, both unions and monopolies seek to reduce supply in order to reap a higher price, but only the monopoly cares about the
supply foregone.

The monopolist is concerned with the employment of the whole stock available. He is equally interested in every fraction of this stock. If a part of it remains unused, it is his loss. Nonetheless he chooses to have a part unused because under the prevailing configuration of demand it is more advantageous for him to proceed in this way. It is the peculiar state of the market that motivates his decision.

The monopoly seeks to reduce supply and increase the price in order to obtain a monopoly profit. Therefore, the monopoly considers each widget withdrawn from the market when developing its business plan. The monopoly will only withhold a widget if, by withholding the widget, the monopoly reaps a greater profit. Contrast that with the union.

The prevailing labor-union policies are restrictive and not monopoly price plicies. The unions are intent upon restricting the supply of labor in their field without bothering about the fare of those excluded.

The union has no concern with the marginal employee; the first one cut off from union membership. The union only concerns itself with those holding a union card.

Those not admitted must go into less remunerative jobs or must remain unemployed. The unions are not interested in the fate of these people.

The leadership of a union may weigh the benefit of adding union members when it considers the amount of union dues foregone. But the adding or subtracting of union members still leaves the greater majority of workers outside the union, and outside the concern of the union.

The key here is that a monopoly faced with a warehouse full of widgets or acres of underutilized capital has to account for each widget withdrawn from the market. The union faced with billions of laborers does not have to account for those denied union membership — withdrawn, so to speak, from the union-control sector of the economy.

OK, let us look at local taxing districts.

In order to generate additional tax revenue, local school districts in Ohio must place operating levies on the ballot.[1] School districts can tax land, income, and sales — under special arrangement with their county government. Once approved by 50% + 1, these taxes are paid by all residents subject to the tax.

The school district has options for taxing income. A school district can construct its income tax levy to garner votes from certain residents by exempting those very same residents from the tax, or from the full brunt of the tax.

In addition, state law exempts senior citizens and others from a portion of their property bill. The school district's partner in crime — the state — reimburses the school district for lost property taxes out of revenue generated by state-wide taxes and fees. Of course, nonexempt residents and businesses throughout the state pay the property tax exemptions — the state only has what it steals.

Regardless, all exemptions assist the school district with its efforts to garnering support for a new levy. This is done through the creation of a pool of voters who are not subject to the tax they are being asked to approve — redistribution of sorts at the local level.

Just like a local taxing district, a club can raise its fees. Depending on the structure of the club, the fees can be raised by the governing body or through a vote of the majority of members, or by any means granted in its charter. And, just like the school district, the club can create fee structures that benefit some over the rest.

So, on the surface, the club and the local taxing district function the same with regard to their respective fees and taxes. However, we have to look just a little deeper.

Since the school district is only concerned with garnering a majority of votes, the district has no concern for the no voters should the levy pass. Those folks must pay the new tax regardless of their vote or belief.

Not so with the club. The club must concern itself with every individual since the club stands to lose if members leave. In this sense, the club is the monopoly balancing its increased fee against the number of members — and their dues — that may leave should the fee increase.

The school district, on the other hand, acts similar to the union: the district is not concerned that residents may leave in the face of a new tax levy. In Ohio anyway, the property tax rate for a levy adjusts so that any tax revenue lost due to reduced property values is levied on the remaining properties. In other words, if residents begin putting their homes up for sale, causing property values to fall, or businesses dismantle and relocate capital, the remaining residents and businesses must pay additional taxes in order to keep the school district whole.

This protection from property values provides an incentive for school officials to propose the largest levy that will win approval of the majority of voters, no matter how small the majority.

Is government a club or a prison? It is certainly not a club, but is it a prison? Some will argue that government is not a prison at the local level since residents can vote with their feet. However, for those who want to keep their current property, government creates a prison housing the innocent who must continually plead guilty and pay all fines or penalties handed down.

Notes

[1] I am using local school districts since they are the largest local taxing districts in Ohio. What follows is an oversimplified review of Ohio school district tax laws.