Milton Friedman Interviewed
Unsigned News Article
[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
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
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