Saturday, December 19, 2009

The Law and the Profits: Part 2

The Law and the Profits, by C. Northcote Parkinson (of Parkinson's Law fame). Chapter 1, continued.

Chapter 1 delves into the reasons for increasing taxation before attempting to persuade concerning the evils of excessive taxation. In short, he attributes the trend increase to "temporary" wartime increases that are never fully decreased once the war is over. This long paragraph, excerpted from the beginning of Chapter 1 is too well-written to attempt a paraphrase:

Governmental as opposed to individual income is historically linked with the incidence of war. In all systems of revenue there has always been the provision for the temporary expenses of conflict. During a time of emergency, with our interests, our beliefs, our pride, or even our existence at stake, we agree to pay almost anything as the price of victory. In theory the revenue should fall to something like its previous level. In practice it seldom does. While the governmental income remains almost at its wartime level, peacetime expenditure rises to meet it. In times past the action of this law was slightly restrained, to be sure, by two considerations which no longer apply. In the first place, it was usually felt that taxes had to be reduced somewhat in time of peace in order to allow for their being raised again in time of war. During a century, however, when each successive war is judged to be the last, this theory finds no further support. In the second place, there are types of extravagance which yield only a diminishing return. To the provision of banquets and the enjoyment of dancing girls there is (eventually) a physical limit. The same is not true, unfortunately, of departmental and technical luxuriance. Economic and cultural advisers can multiply beyond the point at which concubines might be thought a bore; beyond the point even at which they might be thought unbearable. Financially, as well as aesthetically, the situation has become infinitely worse.
One can look into the history of the United States to understand when taxation has been introduced. Article 1 of the U.S. Constitution provides for "Taxes, Duties, Imposts and Excises," of which primarily duties, imposts and excises were chiefly in force in the colonial period. The first instance of the income tax is in 1861 during the Civil War (at a mere 3% single top rate). Though struck down as unconstitutional, it was introduced again in 1894 during peacetime (at a mere 2% single top rate), but was struck down again as unconstitutional. It was revived permanently (thus far) in 1913 following ratification of the Sixteenth Amendment. The highest rates were increased from 7% to 77% between 1916 and 1918 during World War 1. Following the war, the rates were reduced (generously, we might think) to (only) 24%, though it took until 1929 to reach this nadir. Rates went up again (to 81% by 1941) to combat the Great Depression, increased further to 94% (by 1942) during World War 2. Rates came down (only) to 82% (by 1949), then increased again to 92% in 1952-1953 (the onset of stalemate in the Korean War). Since then, rates have trended downward to the present highest rate of 35%. (See this Wikipedia article for the details.)

Payroll taxes were introduced to combat the Great Depression (Social Security) and the War on Poverty (Medicare), and have been expanded several times over several decades to increase revenue and expand public services.

It is clear simply from U.S. history that Parkinson observed correctly. Taxation does not seem to return to pre-war levels, giving rise to the statement of the second law, that expenditure must inevitably rise to meet the increased level of taxation.

In the next article, we shall take up the details of taxation somewhat from the civil service and political viewpoint.

Thursday, December 17, 2009

The Law and the Profits (Part 1)

Earlier this year, I read The Law and the Profits, by C. Northcote Parkinson (of Parkinson's Law fame). This book was first published in 1960, and though the subject of the analysis is Great Britain and the supporting figures are many decades old, the theme is still true and relevant today in the United States.

(My 1960 first edition American printing was recently shredded and eaten by my two dogs, so I have since acquired--for around fifteen dollars--a replacement 1960 first edition London printing from Alibris. The drawings within are different, but the text appears to be the same. This survey of the book is based on the first edition.)

I have not found (by Google search) any material about this book, save a brief mention in this Wikipedia article concerning Parkinson's Law, and then only to call it a corollary to the first law. It is in fact Parkinson's Second Law--claimed so by the author himself in Chapter 1.

Chapter 1 is titled "Parkinson's Second Law" and opens thus:
Expenditure rises to meet income. Parkinson's Second Law, like the first, is a matter of everyday experience, manifest as soon as it is stated, as obvious as it is simple.
The first example is of a family implicitly obeying this law. However, the subject of the book is government, and to that he moves in the second paragraph and rarely leaves this subject again for the remainder of the book.
It is less widely recognized that what is true of individuals is also true of governments. Whatever the revenue may be, there will always be the pressing need to spend it. But between governments and individuals there is this vital difference, that the government rarely pauses even to consider what its income is.
("What its income is" does not refer merely to accounting, although the early 20th-century British government appears to have had a problem even with this. Rather, this phrase, as we will see in later installments, refers particularly to the nature of the income and not merely its quantity.)

It is arguable that governments that annually rely on deficit spending are described perfectly by this statement. I will need to return to this topic later.

With this simple understanding of Parkinson's Second Law, let me quote now from the "Preface:"
The first purpose of this book is to show that there are limits to the collection of revenue and that evils multiply when these limits are ignored. However, the tendency to cross these limits appears to be universal, eternal and all but irresistable: the growth of taxation is clearly subject to a law.

The second purpose of this book is to show that a greatly reduced revenue would bring about an improvement, not decline, in the public services. It is the paradox of administration that fewer people have less to do and more time, therefore, in which to think about what they are doing. When funds are limitless, the only economy made is in thinking. The worst inefficiencies do not stem from a lack of funds, but from an initial failure to decide exactly what the object is. It is this muddled thinking that leads to waste, and often to waste on a colossal scale. Towards eliminating public waste an essential step is to reduce the total revenue. Officials are less inclined to squander what is not there. A knowledge of the law which governs expenditure should ensure that the profits from taxation are rarely thrown away.
I believe that Professor Parkinson succeeded completely in this book achieving his first purpose. I will determine through this survey whether I think he succeeded in the second.

I have observed in recent decades in the United States that the reduction in revenue was tried in the 1980's, but because a reduction in spending was politically impossible and that seemingly limitless borrowings were available to fund the annual deficit, that the government-reducing scheme was a failure. I do not think that this disproves Parkinson's second purpose, because I do not think he imagined a government with a fiat currency. The second purpose would hold if government were somehow constrained to spend within its means.

This quote leaps out at me: "When funds are limitless, the only economy made is in thinking. The worst inefficiencies do not stem from a lack of funds, but from an initial failure to decide exactly what the object is. It is this muddled thinking that leads to waste, and often to waste on a colossal scale." If you substitute the concept of "family" or "small business" or "association" or "church" in place of "government" in the preface, the raw and personal truth of these statements becomes clear. If it were my own money and my own decision, I would be inclined to be thrifty and clear on what I spend it.

Next in the series, I will continue with Chapter 1 concerning the rise in taxation over time.