Good afternoon!

The title of my talk is:

Why We Don't Need Any Stinking Taxes

I'm Fred Foldvary

I teach economics at Santa Clara University in California.

You've heard people say, "Government is a necessary evil."

And you've probably heard the saying

"Taxes are what we pay for civilization."

Well, I have a different saying. I say,

"We don't need any stinkin' taxes."

"We don't need any stinking taxes."

Some critics of the current tax system say we should switch

to a flat income tax or a national sales tax.

A flat-rate income tax is less destructive, less stinky.

than one with complicated graduated tax brackets,

but it still causes economic damage,

what economists call an excess burden,

a burden to the economy beyond the taxes paid.

It's also called a "deadweight loss."

A sales tax takes earnings when you spend them

rather than when you get them.

I don't see any big difference

between taxing you when you leave a room

rather than when you enter a room.

An income tax punishes savers,

while a sales tax punishes borrowers.

There is no economic reason to be biased against one or the other.

We don't need to punish either one.

Any tax on earnings or spending stinks.

It forcibly takes away what is properly yours.

It raises prices and reduces production and investment.

It misallocates resources.

The economic waste caused by stinky taxes in the U.S.

is more than a trillion dollars per year.

Taxes stink not only because of the force and waste, but also

because stinky taxes are unnecessary.

We don't need any stinking taxes!

But how can we finance government without taxes?

Even anarchists want public services:

streets, highways, parks, protection from theft, fire protection, education,

defense against foreign attacks.

First of all, the saying, "government is a necessary evil,"

is nonsense.

If government is necessary, then it is not an evil.

If government is evil, then it can't be necessary.

Evil is something bad that we don't need or want.

We need governance: rules and civic services.

We don't need statist coercion,

forcing us to bear unwanted costs.

We want civilization,

but most of us don't want tyranny.

So, long story short, how can we get public revenue

without the evil of tyrannous taxation?

The answer is right here.

Right here where you're sitting.

You just need to make a leap of logic.

Leap from status-quo thinking to full-spectrum thinking.

Look around us right here.

Where are we?

We are in a hotel.

This hotel is a private enterprise.

The hotel is also a community.

It's a community that provides services

very similar to those of government.

Does anybody here wonder just HOW a hotel

can possibly finance its services?

Well, if that's not a puzzle,

then we have our answer to the question,

"how can we finance government without taxation?".

The concept of a hotel as a community,

a private-enterprise community,

seems obvious,

but most economists today have still not grasped the concept.

It was pioneered by Spencer Heath, in his book

Citadel, Market and Altar,

and the idea has been carried forward by his grandson,

Spencer MacCallum, who is with us here today.

So how does a hotel charge for its services?

First, guests pay for some services with user fees.

When you have breakfast here,

you pay for your individual meal.

When you buy a postcard or souvenir, you pay for it.

Why does the hotel charge for these goods?

Because if you don't want to pay, you don't get the good.

For individually used goods,

it's efficient to charge the users.

For example, when you get a passport, you pay a user fee,

because the passport is only for you.

Many government services could be financed from user fees.

Government could charge and sometimes does charge user fees

for some parks,

such as state and national parks,

where people have to come through an entrance

where they pay for admission.

Government could charge user fees for schooling

instead of financing schools from taxes.

Private schools and universities charge tuition;

government-run colleges and universities are also relying more on tuition.

Why not also charge tuition for elementary school and high school?

The hotel also gets restitution or penalty payments when the guests break property or violate the rules.

Government can charge people when they harm others,

such as by polluting the environment,

or by making highways more congested.

These are negative external effects,

what economists call "negative externalities."

Suppose a factory pollutes a river.

If the river is privately owned,

the owner may demand compensation for the damage.

If the government owns the river,

it should properly get the same compensation,

since it is the people's river,

and somebody has trespassed

and destroyed their property.

The government could call this a pollution tax.

And it could be considered a tax in form,

as a payment to government.

But in substance, the pollution payment is not really a tax.

In reality, it is compensation for damages,

just as if the owner were sued.

Similarly, cars that have toxic emissions should compensate for that damage.

We now have remote-sensing technology to measure car exhaust pollution,

and then send the owners a bill for the damage.

Pollution charges are not stinky,

because the pollution stinks,

and the charge reduces and compensates

for stinking up our environment.

The biggest payment in the hotel is for the room.

When you pay for a room in the hotel,

you are really paying for three types of services.

First, you pay the wages of those providing labor services.

Your room charge pays for cleaning

and other labor services associated with your room.

Second, your room charge pays for capital goods.

You pay for the bed, the floor, the walls, the carpets,

the bathroom fixtures, the furniture.

Third, you pay to occupy space.

Your hotel room uses an amount of three-dimensional space

with a particular location.

That space has economic value,

and you pay rent to use that space

during a particular time interval.

People make similar payments when they rent an apartment or house.

The rental pays for wages, capital goods, and land space.

These are the three factors or input categories of production.

When you go to your hotel room,

you probably use the elevator.

Does the hotel charge you for the elevator?

No, it doesn't.

And why not?

People need and want to use the elevator, so why not charge a user fee?

Charging a quarter for the elevator would create an annoyance.

There would be a transaction cost

of having to fish out coins

and pay the operator or put the coin in a machine.

And what if you didn't have change?

Charging a fee would make people use less elevator service.

This would be inefficient,

because there is a benefit to freely being able to go back and forth to your room.

The most important reason

for not charging a user fee for elevators

is that the cost of one more user in an elevator

is almost zero,

so they would be charging more for an extra user

than he costs.

It would create a "deadweight loss"

of wasted elevator resources.

It is a waste of elevator service

to make someone use the stairs

when the cost of letting him ride

is zero.

So to avoid the expense and hassle,

the hotel offers gratis elevator service.

So how is the elevator paid for?

The room charge pays for the elevator costs.

The hotel provides collective goods,

goods and services used by the guests in common.

It has streets in the form of corridors and stairs.

It has a public park in the lobby.

It has security services, recreation, and administration.

These are all financed from the room charge, why?

because that is the efficient way to pay for them.

These collective services create economic value

in the space occupied by the room.

The room rental takes into account

the elevator service, the security, and so on.

So a rule for efficiency is

that where the extra or marginal cost is high,

as in room service for food,

it is efficient to charge a user fee.

Where the marginal cost is low,

and the service is tied to a place one can charge rent for,

it is efficient for the service to be provided gratis,

paid for from the extra rental it generates.

The philosopher and economist John Stuart Mill

said that this principle,

that locational benefits get capitalized into higher site value,

is the most important policy principle in economics.

If you understand it,

everything else falls into place.

If you don't understand it,

you remain economically clueless

regardless of what else you know.

Condominiums finance their collective goods using the same principle.

Typically, each co-owner is assigned

a percentage ownership of the common elements.

A unit owner pays a monthly assessment based on this percentage.

If he has a one percentage ownership,

he pays one percent of the budget,

and also has one percent of the vote.

The assessment is, ideally,

related to the relative value of the unit,

based on its size and location,

but unrelated to the personal property inside that unit.

The assessment is unrelated to the owner's income or spending.

The condominium accomplishes what some economists,

even big free-market economists,

have thought is impossible.

They said it is impossible

to separate the value of space

from the value of buildings and other improvements.

They say there is no way to charge just for space.

But in fact thousands of condominiums are doing just that,

simply by fixing a percentage interest,

and basing the assessment on that.

The condominium offers collective goods to its members and tenants:

landscaping, parking, security, a community room, recreation, utilities,

and exterior building elements.

These have a zero marginal cost.

As with a hotel,

they increase the value of the locations of the units,

and the unit owners pay a rental for these

in the form of the monthly assessment payments.

Residential or homeowner associations finance their public goods similarly.

Likewise, proprietary entrepreneurial communities,

such as marinas, industrial parks, shopping centers and malls, land trusts,

and apartment buildings

finance their collective goods and services by charging rentals.

These rentals are market prices.

They are paid voluntarily, unlike taxes.

They are based on benefits, unlike arbitrary taxes.

Voluntary market prices smell sweet

because they allocate resources efficiently,

in contrast to stinky taxes

that violate liberty, stifle enterprise, and waste scarce resources.

It is economically possible

to have the whole world

made up of private communities.

Every location

would be part of some proprietary community

such as a hotel or shopping center,

or part of a civic association

such as a condominium or homeowner association.

Not only would we have no stinkin' taxes,

we would also have contractual governance,

instead of imposed tyrannous government.

There could be homeowners or enterprises

that don't want to associate with other co-owners,

so they would constitute their own small individual communities, and

I don't see any problem with that.

But, what about services that are bigger in scope

than a local neighborhood?

How about, say, mosquito control?

Well, the private communities

would not just sit there in isolation.

A group of communities in some area

would form a higher-level greater-area association,

so they can coordinate mosquito control,

or jointly own major highways,

or have a common policy for air pollution.

This second-level association

would be financed by dues from the lower-level associations.

The first-level association

would send representatives to a council or board

to be represented in the second-level association.

If the second-level association becomes ineffective,

the first-level members secede, and form a new one.

So the exit option

helps the voice option

to keep the higher level effective.

This bottom-up multi-level concept

can be carried on to a third level,

where there is a board or council elected by second-level associations.

We can carry this all the way to a continental association.

The financing is bottom up.

Each association gets financed

only from the associations of the next lower level.

The entire continent of North America

could be made up of voluntary communities

ultimately financed

from the site rentals of the local communities.

Economists, even free-market fans,

scratch their heads

wondering

how to pay for national defense.

Some say, well,

we need some stinky taxes to pay for defense,

since otherwise folks will want to be free riders.

Once we establish a system of national defense,

how can we get folks to pay

without forcing them with stinking taxes?

The problem

is that these economists are thinking inside the statist box.

They forget that national defense protects

territory,

and most folks want to be located

where the action is.

The locations that are popular have a market rent.

So there are no free riders for territorial goods.

The street, the park, the protection of property rights,

all these make the locations valuable,

and folks need to pay rent,

either to a landlord or

as the purchase price of land.

In a world of private communities,

some of the rental payment

to the hotel or condominium

gets passed on to the higher level associations

and on up to the continental association that provides the national defense.

So, national defense in a free market?

No problem!

But what about today's world?

Since we don't live

in a world of consensual communities,

don't we need stinky taxes?

The answer is no,

of course not.

Government could finance itself

the same way that private communities do.

Instead of stinking' taxes on income and sales,

government could charge according to the site values.

Just like the hotel elevator and lobby generate greater rentals,

government services,

to the extent folks want them,

generate extra site value,

which can be tapped for revenue.

Of course there are also many disservices

that government should eliminate,

which would greatly reduce

the expense of government.

User fees, penalty payments, and site rentals

would offer all the revenue we need

for those government services

that folks find useful.

These payments are market prices for wanted benefits.

Ground rent and site rentals don't stink,

because there are already and always there.

Unlike arbitrary stinker taxes,

that make production hide, shrink, or flee,

tapping the rent does not make land disappear.

So site-value payments don't cause a deadweight loss.

Site-value payments are compatible with laissez-fair.

So I say to free marketeers,

libertarians, and fiscal conservatives:

please!

Stop advocating stinker taxes.

Stop pushing for a flat income tax, import duties,

or a national sales tax.

These taxes stink!

And there is no excuse for them.

Taxes that create an excess burden are unnecessary.

Instead lets us privatize, marketize, and decentralize.

So long as imposed government there must be,

it can yet be burden free.

If it copies what we see

in a private community.

All the public revenue we need is right under our feet,

in ground rent and site value.

That's why we don't need any stinking taxes.

Thank you, and I'll be pleased to answer any questions.