This essay first appeared in the Nov. 15, 2022 Epoch Times.
During the 2012 presidential election campaign, President Barack Obama notoriously told business owners “You didn’t build that.” He was trying to justify hiking taxes on “the rich”—meaning the productive and successful.
“You didn’t build that” was not original with Obama. He may have borrowed it from Sen. Elizabeth Warren (D-Mass.), and she likely lifted it from earlier Democratic politicians or from academic leftists. Nevertheless, in this essay I’ll call it the “Obama argument.”
Although this episode happened a decade ago, I’m sure we’ll see the Obama argument again. Sound-bites like that re-resurface whenever politicians want to raise taxes. So let’s examine it more closely. That way, when it comes up again, we’ll be ready.
The first thing to understand is that Obama wasn’t exactly claiming that business owners hadn’t built their businesses. It just sounded that way because he stated his case poorly. Here’s the actual argument:
“Entrepreneurs and other business owners need government-created infrastructure. They rely on national defense and police protection. They get supplies and deliver products over government-provided roads. They employ people educated in public schools. Business owners didn’t build those roads, police stations, and schools. The government did. It’s only fair that they pay back the government for the benefits they enjoy.”
This statement may seem reasonable. In fact, however, it’s a classic instance of sophistry. Sophistry is the term applied to an argument that seems plausible when you first see it, but actually rests on a hidden fallacy.
This particular piece of sophistry is particularly beguiling, because it relies on several hidden fallacies, and it preys on a fundamental misunderstanding of how entrepreneurship works.
Fallacy #1: You Didn’t Pay for That
The Obama argument presupposes that government services are free gifts to business owners. In reality, of course, business owners pay heavily for these services: corporate income taxes, sales taxes, employment levies, user fees, and so on. If, after paying all those impositions, the business has any profit to distribute to its owners, then the owners are further assessed: personal income taxes, capital gains taxes, inheritance taxes, and so forth.
Indeed, because of the structure of the tax system, many business owners already pay more than their fair share for those services.
Some items of physical infrastructure, such as bridges and highways, were built years ago and financed by people now gone. But business owners ultimately pay for those, too. They pay taxes to maintain them, and if the physical infrastructure is old, the prospect of future replacement costs depresses the current value of their businesses.
Once Fallacy #1 is corrected, the Obama argument is reduced to “You’ve already paid for this stuff, so you should pay even more.”
Fallacy #2: Government Services Are Worth It
Almost anyone familiar with government operations knows they usually aren’t very efficient. Put another way, taxpayers usually overpay for government benefits. Sometimes, as in the case of ill-conceived social programs, government spending positively hurts business owners. (Think of the effect of COVID-19 relief checks on the availability of workers.)
Of course, some government programs are unavoidable. These are the traditional “core functions of government.” They are activities that are both (1) necessary for maintaining a civilization and (2) not practical for the private sector to perform. They include national defense, police protection, most roads, and many parks.
But core functions now consume only a small fraction of the revenue government collects from business owners and other citizens. National defense, the federal government’s most important core function, represents only 10 percent of the federal budget. At the state and local level, the most important core functions are the police, courts, correction, and highways. All of those combined make up less than 14 percent of state and local expenditures. The rest goes to social programs, such as health care and education, that the private sector could provide at less cost and with better results.
Once Fallacy #2 is corrected, the Obama argument is reduced to, “You are overpaying for some government services, so you must overpay for more.”
Fallacy #3: You Must Pay for What You Didn’t Ask For
Our legal system recognizes that, as a rule, it’s immoral to charge someone for something he didn’t order.
Here’s a hypothetical case I used to pose to law students: Suppose you go on vacation. While you are away, one of your neighbors decides that your house needs a new coat of paint. He takes it upon himself to paint the house for you without asking. When you come back, he demands to be paid the market rate. Do you owe him anything?
Except in highly unusual circumstances, the legal answer is “no,” and every student I ever asked agreed with the legal answer. If your neighbor sues you, a judge will brand him an “officious intermeddler” and dismiss his claim. This is true even if you love the color of his paint and even if the paint job raises the value of your house.
This officious intermeddler rule (as it’s called) has two reasons behind it. One is that we don’t want to encourage officious intermeddlers. The second, which I find even more important, is that no one has the right to invade your space (in this case, your property rights) without your explicit or tacit consent.
Yet government routinely defies the officious intermeddler rule by charging you for “services” you didn’t ask for and do not want. For example, I’d love to get out of the Medicare system. I want my Medicare taxes and premiums back, and I’d like to negotiate and pay for my own medical bills and insurance premiums. If most of us could do that, health care costs would be a lot lower. But the sachems who run the federal government have decided to force a “service” down my throat, grossly inflating health care costs in the process.
In the United States, we try to minimize how “officiously” government intermeddles by allowing the people to elect officials and vote directly on certain measures. But that only reduces the injustice; it doesn’t eliminate it. Further, most government decisions are now made by career bureaucrats for whom elections are largely irrelevant.
The bottom line is that outside of the core services mentioned above, no one should be forced to pay for services to which he didn’t consent. Put another way, if the private sector can provide a service, government generally should not.
Once Fallacy #3 is corrected, the Obama argument is reduced to “We’ve already foisted on you costs for services you didn’t request, so you must pay for more services you didn’t request.”
The Ignorance Behind the ‘You Didn’t Build That’ Claim
The final flaw in the Obama argument is that it rests on ignorance of how entrepreneurship works.
Entrepreneurs identify opportunities from the surrounding environment. If that environment includes a government program, the entrepreneur may take advantage of it. Thus, if the government mandates a “single payer” health care system, an entrepreneur may build a health care practice relying on government payments. But that doesn’t mean the program is necessary for entrepreneurship. If instead of “single payer” most health care is paid for by patients and insurance companies, then the entrepreneur may devote his energies to building a practice that provides affordable care directly to patients.
It’s ridiculous, therefore, to claim that entrepreneurs owe money to the government because they take advantage of programs they didn’t ask for. On the contrary, business owners will, on average, do better in a private enterprise environment than in a big-government environment. This is because, as often documented (see, e.g., this pdf), big government depresses the economy as a whole, impeding wealth creation and reducing purchasing power.
In other words, on average big government doesn’t make business owners richer. It makes them poorer.
The ignorance behind the Obama argument is to be expected from politicians (such as Obama and Warren) with little or no experience in the private sector. But that doesn’t mean we have to buy what they’re selling.