Milton Friedman Interviewed

Unsigned News Story

[Reprinted from The Times Herald, Norristown, Pennsylvania; Friday, 1 December, 1978]

Question: I find income tax totally antagonistic to true free enterprise. Can we run the country without income tax?

Dr. Friedman: There's a sense in which all taxes are antagonistic to free enterprise . . . and yet we need taxes. We have to recognize that we must not hope for a Utopia that is unattainable I would like to see a great deal less government activity than we have now, but I do not believe that we can have a situation in which we don't need government at all. We do need to provide for certain essential government functions - the national defense function, the police function, preserving law and order, maintaining a judiciary. So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.

The next least bad tax is a flat-rate tax on income above an exemption. I could design my ideal tax system it would contain an income tax, but it would not be the kind of monstrosity we have now. It would be a flat-rate tax on all income, from whatever source derived, less only a personal deduction and strict occupational expense, and that kind of income tax I think would be the least inconsistent with a strong free enterprise system.

Question: Dr. Friedman, you have been quoted as saying the Social Security tax is the worst tax on the books and should be abolished. What would you use as a substitute?

Dr. Friedman: First, you must understand that the Social Security system is not an insurance system. The taxes that people are paying under the system are not in any relevant sense financing the benefits they themselves will ultimately receive. The Social Security system is a combination of a bad tax and a bad expenditure program. I have never heard anybody who would defend either half separately, and taking two bad things and putting them together doesn't generally make something good. But combining the two, and giving the impression that the system is self-financing, tends to support the fiction that Social Security is really an insurance contract. It's not an insurance system at all. What it is a scheme whereby people today are paying taxes today to provide payments and benefits to other people today. There is a relationship between the amount beneficiaries receive and the amount they themselves pay, but that relationship is very small. Insofar as there is that relationship, you can justify an element of payroll tax; but insofar as a large part of Social Security benefits are properly to be understood as subsidies, welfare payments, there is no justification for financing them out of a payroll tax. In my opinion, if you are going to finance them, they should come out of federal revenues.

Now you will say to me, "Oh, but that's "terrible. Does that mean that you're proposing that we increase other taxes?" No! Let me go back to the fundamental principle: Government is going to spend whatever the tax system will raise plus a little more - lately a good deal more. The only effective way to keep down government spending is 10 keep down the amount of money available to government to spend. There is no other way you can do it. The effect of giving the impression that Society Security is an insurance system by using the payroll tax, and implying that what each individual pays is linked to what he receives - the effect of that has been to make the American people willing to bear a larger tax loan than they otherwise would bear. I argue the other way: Reduce taxes whenever you can! What you should worry about is total spending. If you reduce the payroll tax and throw the burden on the general tax level, that will be an effective way of stopping even worse programs.

Question: Can you give us your concept of the welfare situation today?

Dr. Friedman: There is only one word to describe the welfare situation and that's one of our famous four-letter-word: mess! The so-called welfare program is a collection of a large number of separate programs in which most of the money that is spent does not go to the people whom you would like to get it. The major beneficiaries are intermediaries - the bureaucrats who administer it, the agencies or organizations that benefit from it - and that is also the major obstacle to reform.

Question: Dr. Friedman. do you believe that we should have an audit of the gold in Fort Knox?

Dr. Friedman: No, I believe we ought to sell off the gold in Fort Knox at a public auction at the price we can get. Ido not see any reason why the storage of gold should be a nationalized industry. I believe private people should be free to own gold to do whatever they want with it. 1 do not see justification for the government having a large stock of gold in Fort Knox. You might justify a strategic reserve beyond that I see no justification.

Don't kid yourself into thinking that we're going to have a gold standard again. The kind of gold standard we had in the 19th century had something to be said for it, but we haven't had that kind of gold standard since 1914 and we aren't about to have it again. Therefore, in my opinion, the right thing to do with the gold in Fort Knox is to auction it the highest bidder.

Question: Do you believe we should have an audit of the Federal Reserve System?

Dr. Friedman: If you are going to ask me about the Federal Reserve System, my ultimate solution is to abolish it and that would eliminate the necessity for an audit. But that isn't going to happen tomorrow. The problem with the Federal Reserve System is that it is following the policy Congress imposes on it, and in my opinion what we want is not a more independent Federal Reserve System; what we want is to require Congress to be responsible for setting forth specific rules for the conduct of monetary policy. I believe we need a more responsible monetary policy and I do not believe that an audit of the Federal Reserve System would in any way contribute to that more responsible policy.