1991 • 315 pages • $24.95 cloth
The effects of taxation (or regulation, which is taxation in disguise) can be understood by analogy to the children’s game of dodge ball. In search of revenues, governments throw various types of taxes at their citizens. Those who can relatively easily dodge the tax burden by changing their behavior (e.g., through moving their assets, exploiting tax loopholes, or entering the underground economy) aren’t hit very hard or often, making them poor targets for taxation. Those who find it difficult to dodge because such behavioral changes are more costly (e.g., producers with large existing physical plants, which are difficult to relocate) are tempting taxation targets, and can become seriously bruised as increased taxes fuel the growth of government at their expense. These citizens would like to be able to switch over to a less taxing game of dodge ball run by some other government, if only they could move at a low enough cost.
The central argument of Quicksilver Capital is that technological changes are dramatically tilting the game of tax dodge ball in favor of the dodgers, by making capital in all forms more mobile, which limits the power of governments to tax citizens without giving them sufficiently valued services in return. “As a consequence, governments have lost much of the monopoly power that undergirded their growth in earlier decades . . . . governments have had to compete against one another by seeking more efficient policies in order to retain the physical and human capital that is now so crucial to modern production processes and to the tax bases on which governments depend.” The optimistic upshot is that the myriad of inefficient government policies are beginning to shrink away, and with them burdens on the governed. Attempts to act otherwise are becoming self-defeating, quickly driving the “quicksilver” tax base away to more hospitable shores.
McKenzie and Lee begin by delineating the changes in technology, particularly the quantum leaps in computer sophistication and the consequent reduced scales of efficient production, that drive their premise that capital is being transformed from political captive to quicksilver. Then they demonstrate the growing international integration of goods, services, and capital markets that is consistent with their mobility argument, followed by what seems to be every piece of domestic and international evidence on government expenditures, reduced tax rates, regulations, and privatization that supports their hypothesis. Throughout, they reiterate the power of increasing capital mobility to reshape the fiscal world by taking power from government, and the often dramatic differences between their interpretation and policy prescriptions and the more pessimistic ones of others.
The book is well written for lay audiences, and anyone not already well informed on these issues could hardly fail to learn something. (Though beyond their description of the technological tidal wave taking place, little new will be found by those well versed in the field. The authors’ 1987 book Regulating Government, excerpted in the February 1987 Freeman, does a better job in dealing with many of the growth-of-government issues.) How ever, despite a plausible argument that is highly attractive—implying a declining scope for government in areas where it had no business in the first place—their conclusion that we are headed for a world of Slim-Fast governments is ultimately unconvincing.
The biggest problem with their argument that capital’s ability to move to other locations is putting government on a diet is that such a strong claim is not clearly consistent with the evidence. For instance, despite repeated claims of the power of their quicksilver capital insight to change the world, the authors themselves back away from such assertions to the much more modest conclusion that “We have only argued that greater capital mobility and production sophistication have constrained the growth of governments. Though there is a good chance that governments will actually start contracting on many fronts, the prospects of that outcome are uncertain. To date, the evidence only supports constrained growth relative to national income.”
If the only solid evidence they can muster to support their hypothesis is that governments are growing more slowly than they used to, much of their presentation needs tempering. (If a 600-pound man goes from gaining three pounds a week to “only” two pounds a week, we won’t soon be calling him “Slim.”) This evidence seems far more consistent with increased capital mobility being one influence constraining governments, but not the dominant One. The reductions in the highest marginal tax rates they cite, similarly, seem more consistent with undoing previous tax rates so high that countries were “around the bend” on the Laffer curve of high-income citizens, thereby losing tax revenues, than with a reduction in the size of government because capital is becoming more mobile.
Also seemingly inconsistent with the argument that capital can easily move to avoid taxation, leading government to tax it more lightly, is the tax treatment of capital in the United States in recent years. Capital gains and corporate taxes have risen dramatically, alternative minimum taxes have been imposed, state and local business levies have jumped, and property tax increases have been limited more by populist political rebellion than by capital migration. It seems that either capital is less mobile than McKenzie and Lee maintain, sharply restricting the power of their entire argument, or that the well-known short-sighted bias of governments is leading them to sacrifice possible future gains from attracting as yet uninvested capital in favor of exploiting the large stock of already sited, “captive” physical capital. (Remember that even if one tries to sell such capital and leave, greater government exactions will be capitalized into lower sales prices, making avoiding such burdens quite difficult.) In addition, the market restrictions and other favors of interest-group politics, which, according to their argument, should have been reduced, hardly have been dying out.
My overall evaluation of the book is best summed up by Nobel prize winner James Buchanan’s dust jacket comment that “Their arguments [of reduced monopoly power of governments everywhere] are surely convincing, up to a point. But I shall keep my fingers crossed, and I shall advise all classical liberals to keep their rhetorical powder dry.” Their analysis is plausible, and there is hope that increasingly mobile capital will become a greater constraint on the power of government in our lives. However, any substantial reduction in governmental power will wait until more people realize that organizing individuals through the coercive power of government rather than through the voluntary cooperation of markets seldom generates more valuable information, creates more wisdom, or produces better incentives for decision-makers to promote the well-being of others. Too few citizens have thought about these issues carefully enough to understand how small the list of logically defensible roles for government is. What is needed is straight thinking in this area, because so long as people believe in ever more roles for government, government will grow.
Professor Gary Galles teaches in the Social Science Department at Pepperdine University, Malibu, California.