Preserving Democracy. Elgin L Hushbeck

(1756-63), ended in the American War of Independence.¹⁰

      A Strange Paradox

      It is a strange paradox that taxes are the lifeblood of the government while at the same time they are one of its greatest dangers. During the Middle Ages, government, if it could be called that, was financed by the wealth of the king or ruler. But as the state evolved, and the need for a standing army and more consistent government services grew, the King had to seek additional sources of revenues. Taxes became the primary funding source. This was a necessary and important precursor to the establishment of democracy. After all if the King pays for the government, how can you get rid of the King? So taxes are not only important; they are required for a democracy.

      Yet while they are required, taxes present one of the greatest single dangers for a democracy, particularly a democracy that seeks to better the lives of its citizens. The more a democracy tries to do, the more it costs, and the more it tries to meet those costs, the more it places itself in danger. This paradox is the reason for Alexander Fraser Tytler’s famous quote,

      A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.¹¹

      The reason for this paradox has long been recognized. Plato speaks of this process as resulting from the leaders’ desire to please. In order to please, the leader needs money to pay for programs that will help the people. To get the money one has to go to those who have it. Thus the ruler will “deprive the rich of their estates and distribute them among the people.”¹²

      Naturally the rich will not appreciate their wealth being taken from them and as a result they will resist these taxes. Soon the citizens of the government are split into two groups: the rich, i.e., those who have the money that government wants, and the people, those who want whatever the money buys. If the rich resist too much, the ruler will “charge them with plotting against the people.” In order to defend themselves against the rich, the people always get,

      some champion whom they set over them and nurse into greatness… This and no other is the root from which a tyrant springs; when he first appears above ground he is a protector… How then does a protector begin to change into a tyrant? Clearly when he does what the man is said to do in the tale of the Arcadian temple of Lycaean Zeus. ¹³

      Plato’s view does not translate directly into the 21^st century. Few know what the man did in the tale of the Arcadian temple of Lycaean Zeus.^d Yet while the details and specifics deal with Ancient Greece, not modern America, the underlying principles have not changed. Plato was concerned with the origin and rise of tyranny, what we would now call a dictatorship or totalitarian government. The tyrant starts out as one protecting the people, either actually or at least as one who rises to power on a claim of protecting the people. But the bottom line for Plato is that tyranny “has a democratic origin”¹⁴

      The Core Problem

      At its core, the problem that threatens democracy is the same one that most families face with their home budgets – there always seems to be more month than money. Except for the very rich, and perhaps even for them, there is never quite enough money to do everything that you would like. Even the rich are limited to some extent. While they can afford a lot, they can’t afford everything. At least, that is, if they wish to remain rich, as many former rich have found out.

      For most this is not just a problem of luxuries, there are medical bills to pay, braces for the kids, educational costs, not to mention food, clothes, the roof over your head, utility bills, and even the cost of transportation to and from work so that you can make the money to pay all the bills. This all goes under the general heading of The Rat Race. In short, there never seems to be quite enough money and most families have to live within some sort of budget, either a structured and planned budget, or an unstructured one where you basically spend until you run out of money and then wait for the next paycheck.

      Democracies face many of these same problems. This is particularly true of the modern welfare state that seeks to better the lives of its citizens through a whole range of government programs. Not only are there the traditional functions of government such as the military and the courts, it is now pretty much taken for granted by many that government should be involved in a whole range of other activities such as building roads, education, health care, the arts, broadcasting, and scientific research, to name just a few. Like the family budget there never seems to be enough money to do everything that people, or at least their politicians, want.

      When a family faces a money crunch, the options for additional money are limited: families can either borrow, or they can change their employment situation by either getting a raise, a better paying job, or getting additional jobs. Some families try to get around the shortage of money by borrowing the extra money they need. If the borrowing is for a major purchase that they will be using for a long period of time, such as a house or a car, this can make sense. But if they are using credit cards simply to add to their monthly income, while it will work in the short term, it will only be a temporary fix. Credit cards are not a good option in the long term.

      For a short period of time, one can artificially increase their disposable income by using credit cards. Need an extra $200 per month to make ends meet? Transfer $200 per month of spending onto credit cards and the problem is solved; but only temporarily. As credit cards are used, their balances go up. And as balances go up so do minimum payments. Before long that extra $200 per month is consumed by $200 in monthly payments to credit card companies that now must be made. In short, using credit cards creates new bills that must be paid and in the long term this only adds additional burdens to the monthly budget. Thus for individuals, the only real long-term solution to additional money is either a raise, a better paying job, or an additional job.

      Governments can also borrow money, but this has a similar effect as with individuals. Again for major long-term projects this can make sense. It can also make sense when dealing with short-term problems with long term implications such as wars or recessions. Government also has the additional rationale that when the Government borrows money for long term projects such as a road, the money will be paid back by those using the road over its lifetime, at least theoretically.

      An option that governments have, which families don’t, at least not legally, is to simply print the money they need. However, this is not a very good option, as simply increasing the number of dollars only makes each dollar worth less. In short you have inflation, and while you have more money, everything now costs more.

      One other option governments have is to raise taxes. This is somewhat like an individual asking for a raise. However whereas an employee can ask, governments demand under penalty of law. Therein is the danger, for taxes act as a burden on the economy. If this is already clear to you, you can skip the next section and go directly to Taxes in Action. However if it is not clear, or if you question this, then continue reading.

      Foundations

      The foundation of our entire economic system is providing goods and/or services for a fee. Businesses either succeed or fail, based on whether they are providing goods or services that people want, at a price that they are willing to pay.^e The businesses that do this well tend to make a lot of money, the ones that don’t, do not stay in business very long.

      When someone gets a job, they are to some extent a business providing a service.^f Their ‘customer’ is their employer. If they can provide a service that an employer is willing to pay for, then they get a job. Now just as some businesses are able to charge more for their goods and services, likewise some jobs pay more.

      Discussion of the specific price difference involves going into the theory of supply and demand and is beyond the scope of the discussion here, but in short to get a better paying job, or to have a successful business, a person must find a need that is not being met, or not being met well, and then address that need in a way that is better than the competition. We will look more in depth at competition in the next chapter. But this boils down to a