WEBVTT NOTE 12.08. Binary Intervention: Taxation 1 00:00:00.000 --> 00:00:05.120 8. Binary Intervention, Taxation 2 00:00:05.120 --> 00:00:10.720 a. Income Taxation 3 00:00:10.720 --> 00:00:17.600 Taxation as we have seen takes from producers and gives to others. Any increase in taxation 4 00:00:17.600 --> 00:00:25.520 swells the resources, the incomes, and usually the numbers of those living off the producers, 5 00:00:25.520 --> 00:00:31.520 while diminishing the production base from which these others are drawing their sustenance. 6 00:00:31.520 --> 00:00:35.520 Clearly, this is eventually a self-defeating process. 7 00:00:35.520 --> 00:00:43.520 There is a limit beyond which the top-heavy burden can no longer be carried by the diminishing stock of producers. 8 00:00:43.520 --> 00:00:49.520 Narrower limits are also imposed by the disincentive effects of taxation. 9 00:00:49.520 --> 00:01:07.520 The greater the amount of taxes imposed on the producers, the taxpayers, the lower the marginal utility of work will be, for the returns from work are forcibly diminished, and the greater the marginal utility of leisure foregone. 10 00:01:07.520 --> 00:01:14.720 Not only that, the greater will be the incentive to shift from the ranks of the burdened taxpayers 11 00:01:14.720 --> 00:01:21.920 to the ranks of the tax consumers, either as full-time bureaucrats or as those subsidized 12 00:01:21.920 --> 00:01:23.480 by the government. 13 00:01:23.480 --> 00:01:30.080 As a result, production will diminish even further as people retreat to leisure or scramble 14 00:01:30.080 --> 00:01:34.860 harder to join the ranks of the privileged tax consumers. 15 00:01:34.860 --> 00:01:40.380 In the less developed countries where a money economy is still emerging from barter, any 16 00:01:40.380 --> 00:01:47.040 given amount of taxation will have a still more drastic effect, for it will make monetary 17 00:01:47.040 --> 00:01:53.520 incomes much less worthwhile and will shift people's efforts from trying to make money 18 00:01:53.520 --> 00:01:57.700 back to untaxed barter arrangements. 19 00:01:57.700 --> 00:02:04.840 Taxation can therefore decisively retard development from a barter to a monetary economy, or even 20 00:02:34.840 --> 00:02:37.240 These incomes will diminish. 21 00:02:37.240 --> 00:02:43.020 The laborer, faced with a tax on his wages, has less incentive to work hard. 22 00:02:43.020 --> 00:02:50.280 The capitalist, confronting a tax on his interest or profit return, has more incentive to consume, 23 00:02:50.280 --> 00:02:53.000 rather than to save and invest. 24 00:02:53.000 --> 00:02:59.600 The landlord, a tax being imposed on his rents, will have less of a spur to allocate land 25 00:02:59.600 --> 00:03:02.080 sites efficiently. 26 00:03:02.080 --> 00:03:09.360 It has been objected that since a man's marginal utility of money assets increases as he holds 27 00:03:09.360 --> 00:03:16.520 less of a stock of money, lower money income will mean an increased marginal utility of 28 00:03:16.520 --> 00:03:17.520 income. 29 00:03:17.520 --> 00:03:24.960 As a result, a tax on money incomes creates both a substitution effect against work and 30 00:03:24.960 --> 00:03:31.800 and in favor of leisure or against saving in favor of consumption and an income effect 31 00:03:31.800 --> 00:03:34.360 working in the opposite direction. 32 00:03:34.360 --> 00:03:40.720 This is true and in rare empirical cases the latter effect will predominate. 33 00:03:40.720 --> 00:03:46.880 In plain language this means that when extra penalties are placed upon man's efforts he 34 00:03:46.880 --> 00:03:54.520 will generally slacken them but in some cases he will work harder to try to offset the burdens. 35 00:03:54.520 --> 00:04:00.020 In the latter cases, however, we must remember that he will lose the valuable consumption 36 00:04:00.020 --> 00:04:01.820 good of leisure. 37 00:04:01.820 --> 00:04:07.820 He will have less leisure now than he would have if his choices were still free. 38 00:04:07.820 --> 00:04:14.260 Working harder under penalty is only a cause for rejoicing if we regard the matter exclusively 39 00:04:14.260 --> 00:04:20.420 from the point of view of those living off the producers, who will thereby benefit from 40 00:04:20.420 --> 00:04:21.580 the tax. 41 00:04:21.580 --> 00:04:27.540 The standard of living of the workers, which must include leisure, has fallen. 42 00:04:27.540 --> 00:04:34.980 The income tax, by taxing income from investments, cripples saving and investment, since it lowers 43 00:04:34.980 --> 00:04:41.220 the return from investing below what free market time preferences would dictate. 44 00:04:41.220 --> 00:04:47.320 The lower net interest return leads people to bring their savings investment into line 45 00:04:47.320 --> 00:04:49.440 with the new realities. 46 00:04:49.440 --> 00:04:56.240 In short, the marginal savings and investments at the higher return will now be valued below 47 00:04:56.240 --> 00:05:00.780 consumption and will no longer be made. 48 00:05:00.780 --> 00:05:07.080 There is another unheralded reason why an income tax will particularly penalize saving 49 00:05:07.080 --> 00:05:10.740 and investment as against consumption. 50 00:05:10.740 --> 00:05:16.360 It might be thought that since the income tax confiscates a certain portion of a man's 51 00:05:16.360 --> 00:05:22.840 Income, and leaves him free to allocate the rest between consumption and investment, and 52 00:05:22.840 --> 00:05:28.820 since time preference schedules remain given, the proportion of consumption to saving will 53 00:05:28.820 --> 00:05:30.860 remain unchanged. 54 00:05:30.860 --> 00:05:37.360 But this ignores the fact that the taxpayer's real income and the real value of his monetary 55 00:05:37.360 --> 00:05:41.480 assets have been lowered by paying the tax. 56 00:05:41.480 --> 00:05:47.580 We have seen in Chapter 6 that given a man's time preference schedule, the lower the level 57 00:05:47.580 --> 00:05:54.140 of his real monetary assets, the higher his time preference rate will be, and therefore 58 00:05:54.140 --> 00:05:58.860 the higher the proportion of his consumption to investment. 59 00:05:58.860 --> 00:06:05.520 Under income taxation, he shifts to a higher proportion of consumption, and a lower proportion 60 00:06:05.520 --> 00:06:08.320 of saving and investment. 61 00:06:08.320 --> 00:06:15.620 For this shift to occur, the individual's real monetary assets must decline, not just 62 00:06:15.620 --> 00:06:18.780 the nominal amount in terms of money. 63 00:06:18.780 --> 00:06:25.820 If then, instead of this tax, there is deflation in the society, and the value of the monetary 64 00:06:25.820 --> 00:06:33.780 unit increases roughly proportionately everywhere, then the nominal fall in each individual's 65 00:06:33.780 --> 00:06:41.560 Money stock will not be a real fall, and hence effective time preference ratios will remain 66 00:06:41.560 --> 00:06:42.880 unchanged. 67 00:06:42.880 --> 00:06:48.760 In the case of income taxation, deflation will not occur, since the government will 68 00:06:48.760 --> 00:06:53.660 spend the revenue rather than contract the money supply. 69 00:06:53.660 --> 00:07:00.000 Even in the rare case where all the tax money is liquidated by the government, the individuals 70 00:07:00.000 --> 00:07:08.380 Socials taxed will lose more than others and hence will lose some real monetary assets. 71 00:07:08.380 --> 00:07:14.300 We have now seen two reasons why an income tax will shift the social proportion toward 72 00:07:14.300 --> 00:07:18.960 more consumption and less saving and investment. 73 00:07:18.960 --> 00:07:24.920 It might be objected that the time preference reason is invalid, since the government officials 74 00:07:24.920 --> 00:07:30.800 People and the people they subsidize will receive the tax revenues and find that their 75 00:07:30.800 --> 00:07:37.120 money stock has increased just as that of the taxpayers has declined. 76 00:07:37.120 --> 00:07:44.680 We shall see, however, that no truly productive savings and investments can be made by government, 77 00:07:44.680 --> 00:07:49.760 its employees, or the recipients of its subsidies. 78 00:07:49.760 --> 00:07:56.440 Some economists maintain that income taxation reduces savings and investment in society 79 00:07:56.440 --> 00:07:58.600 in yet a third way. 80 00:07:58.600 --> 00:08:06.960 They assert that income taxation, by its very nature, imposes a double tax on savings investment 81 00:08:06.960 --> 00:08:09.280 as against consumption. 82 00:08:09.280 --> 00:08:15.200 Double is used in the sense of two instances, not arithmetically twice. 83 00:08:15.200 --> 00:08:17.780 The reasoning runs as follows. 84 00:08:17.780 --> 00:08:21.680 Saving and consumption are really not symmetrical. 85 00:08:21.680 --> 00:08:27.580 All saving is directed toward enjoying more consumption in the future, otherwise there 86 00:08:27.580 --> 00:08:30.700 would be no point at all to saving. 87 00:08:30.700 --> 00:08:37.260 Saving is abstaining from possible present consumption in return for the expectation 88 00:08:37.260 --> 00:08:41.420 of increased consumption at some time in the future. 89 00:08:41.420 --> 00:08:44.820 No one wants capital goods for their own sake. 90 00:08:44.820 --> 00:08:50.140 They are only the embodiment of increased consumption in the future. 91 00:08:50.140 --> 00:08:56.740 Saving investment is Crusoe's building the stick to obtain more apples at a future date. 92 00:08:56.740 --> 00:09:00.220 It fructifies in higher consumption later. 93 00:09:00.220 --> 00:09:07.360 Hence, the imposition of an income tax is a double tax on consumption and excessively 94 00:09:07.360 --> 00:09:10.920 penalizes saving and investment. 95 00:09:10.920 --> 00:09:17.800 These economists generally conclude that not income but only consumption should be taxed 96 00:09:17.800 --> 00:09:21.600 as the only real income. 97 00:09:21.600 --> 00:09:27.060 This line of reasoning correctly explains the investment consumption process. 98 00:09:27.060 --> 00:09:30.220 It suffers, however, from a grave defect. 99 00:09:30.220 --> 00:09:33.640 It is irrelevant to problems of taxation. 100 00:09:33.640 --> 00:09:37.520 It is true that saving is a fructifying agent. 101 00:09:37.520 --> 00:09:40.920 But the point is that everyone knows this. 102 00:09:40.920 --> 00:09:43.880 That is precisely why people save. 103 00:09:43.880 --> 00:09:50.880 Yet even though they know that saving is a fructifying agent, they do not save all their 104 00:09:50.880 --> 00:09:51.880 income. 105 00:09:51.880 --> 00:09:52.880 Why? 106 00:09:52.880 --> 00:09:57.040 Because of their time preferences for present consumption. 107 00:09:57.040 --> 00:10:03.160 Every individual, given his current income and value scales, allocates that income in 108 00:10:03.160 --> 00:10:10.880 in the most desirable proportions between consumption, investment and additions to his cash balance. 109 00:10:10.880 --> 00:10:17.880 Any other allocation would satisfy his desires less well, and lower his position on his value 110 00:10:17.880 --> 00:10:18.880 scale. 111 00:10:18.880 --> 00:10:26.740 The fructifying power of saving is already taken into account when he makes his allocation. 112 00:10:26.740 --> 00:10:34.060 There is, therefore, no reason to say that an income tax doubly penalizes saving investment. 113 00:10:34.060 --> 00:10:41.380 It penalizes the individual's entire standard of living, encompassing present consumption, 114 00:10:41.380 --> 00:10:44.840 future consumption, and his cash balance. 115 00:10:44.840 --> 00:10:52.540 It does not, per se, penalize saving any more than the other avenues of income allocation. 116 00:10:52.540 --> 00:10:58.980 This Irving Fisher argument reflects a curious tendency among economists devoted to the free 117 00:10:58.980 --> 00:11:06.060 market to be far more concerned about governmental measures penalizing saving and investment 118 00:11:06.060 --> 00:11:09.580 than they are about measures hobbling consumption. 119 00:11:09.580 --> 00:11:16.300 Surely, an economist favoring the free market must grant that the market's voluntary consumption 120 00:11:16.300 --> 00:11:22.860 and investment allocations are optimal and that any government interference in this proportion 121 00:11:22.860 --> 00:11:29.300 from either direction is distortive of that market and of production to meet the wants 122 00:11:29.300 --> 00:11:30.960 of the consumers. 123 00:11:30.960 --> 00:11:35.140 There is nothing, after all, particularly sacred about savings. 124 00:11:35.140 --> 00:11:38.420 They are simply the road to future consumption. 125 00:11:38.420 --> 00:11:43.720 But they are, then, clearly no more important than present consumption. 126 00:11:43.720 --> 00:11:50.360 The allocations between the two being determined by the time preferences of all individuals. 127 00:11:50.360 --> 00:11:56.880 The economist who balks more at interference with free market savings than he does at infringement 128 00:11:56.880 --> 00:12:04.080 on free market consumption is therefore implicitly advocating statist interference in the opposite 129 00:12:04.080 --> 00:12:05.160 direction. 130 00:12:05.160 --> 00:12:12.840 He is implicitly calling for a coerced distortion of resources to lower consumption and increase 131 00:12:12.840 --> 00:12:14.440 and Investment. 132 00:12:14.440 --> 00:12:21.400 The bias in favor of investment or growth as against present consumption is similar to 133 00:12:21.400 --> 00:12:25.320 the conservationist attack on present consumption. 134 00:12:25.320 --> 00:12:33.340 What is so worthy about future consumption and so unworthy about consuming in the present? 135 00:12:33.340 --> 00:12:39.980 Perhaps what we have here is an illicit smuggling of the less rational aspects of the Protestant 136 00:12:39.980 --> 00:12:47.020 Ethic into Economic Science, of the many problems involved we may mention one here. 137 00:12:47.020 --> 00:12:53.940 What non-arbitrary quantitative standards for thrift can the economist establish once 138 00:12:53.940 --> 00:12:58.180 the free market's decision is overridden? 139 00:12:58.180 --> 00:13:02.880 B. Attempts at Neutral Taxation. 140 00:13:02.880 --> 00:13:09.540 So far we have discussed the impact of a tax on an individual considered by himself. 141 00:13:09.540 --> 00:13:16.820 Equally important is the distortion of the market's pattern of factor prices and incomes, 142 00:13:16.820 --> 00:13:21.100 created by the way taxes bear down upon different people. 143 00:13:21.100 --> 00:13:28.420 The free market determines an intricate, almost infinite array and structure of prices, rates 144 00:13:28.420 --> 00:13:29.900 and incomes. 145 00:13:29.900 --> 00:13:35.660 The imposition of different taxes disrupts these patterns and cripples the market's 146 00:13:35.660 --> 00:13:39.260 work of allocating resources and output. 147 00:13:39.260 --> 00:13:56.260 Thus, if Firm A pays $5,000 a year for a certain type of labor, and Firm B pays $3,000, laborers will tend to shift from B to A, and thereby more efficiently serve the wants of consumers. 148 00:13:56.260 --> 00:14:04.900 But if the income earned at Firm A is taxed $2,000 per annum, while income at B is taxed 149 00:14:04.900 --> 00:14:12.980 negligibly or not at all, the market inducement to move from B to A will totally or virtually 150 00:14:12.980 --> 00:14:19.780 disappear, perpetuating a misallocation of productive resources and hampering the growth 151 00:14:19.780 --> 00:14:23.740 and even the existence of Firm A. 152 00:14:23.740 --> 00:14:30.840 We have seen that the quest for a neutral tax, a tax neutral to the market, leaving the market 153 00:14:30.840 --> 00:14:36.400 roughly as it was before the tax was imposed, is a hopeless venture. 154 00:14:36.400 --> 00:14:43.980 For there can be no uniformity in paying taxes, when some people in society are necessarily 155 00:14:43.980 --> 00:14:49.480 taxpayers while others are privileged tax consumers. 156 00:14:49.480 --> 00:14:56.080 But even if we disregard these objections and fail to consider the redistributionist effects 157 00:14:56.080 --> 00:15:04.420 of government spending out of tax revenues, we cannot arrive at a system of neutral taxation. 158 00:15:04.420 --> 00:15:10.500 This is true if we also disregard the grave conceptual difficulties of arriving at a 159 00:15:10.500 --> 00:15:17.100 definition of income in accounting for the imputed monetary value of work done within 160 00:15:17.100 --> 00:15:23.660 in a household, of averaging fluctuating incomes over various years, etc. 161 00:15:23.660 --> 00:15:30.540 Many writers have maintained that uniformly proportional income taxes for all would yield 162 00:15:30.540 --> 00:15:32.340 a neutral tax. 163 00:15:32.340 --> 00:15:38.740 For then, the relative ratios of incomes in society would remain the same as before. 164 00:15:38.740 --> 00:15:50.140 Thus, if A. received $6,000 a year, B. earned $3,000 and C. $2,000, a 10% tax on each man 165 00:15:50.140 --> 00:16:03.100 would yield a distribution of A. $5,400, B. $2,700, C. $1,800, the same mutual ratios 166 00:16:03.100 --> 00:16:04.900 as before. 167 00:16:04.900 --> 00:16:11.780 This assumes, of course, no disincentive effects of the tax on the various individuals, or 168 00:16:11.780 --> 00:16:19.040 rather, equi-proportional disincentive effects on each individual in the society, a most 169 00:16:19.040 --> 00:16:21.200 unlikely occurrence. 170 00:16:21.200 --> 00:16:28.180 But the trouble is that this solution misconceives the nature of what a neutral tax would have 171 00:16:28.180 --> 00:16:29.480 to be. 172 00:16:29.480 --> 00:16:35.980 For a tax truly neutral to the free market would not be one that left income patterns 173 00:16:35.980 --> 00:16:38.000 the same as before. 174 00:16:38.000 --> 00:16:45.160 It would be a tax which would affect the income pattern and all other aspects of the economy 175 00:16:45.160 --> 00:16:51.320 in the same way as if the tax were really a free market price. 176 00:16:51.320 --> 00:16:56.880 This is a very important correction, for we must surely realize that when a service is 177 00:16:56.880 --> 00:17:00.080 is sold at a certain price on the free market. 178 00:17:00.080 --> 00:17:07.280 This sale emphatically does not leave income distribution the same as before. 179 00:17:07.280 --> 00:17:15.160 For normally, market prices are not proportional to each man's income or wealth, but are uniform 180 00:17:15.160 --> 00:17:22.480 in the sense of equal to everyone, regardless of his income or wealth or even his eagerness 181 00:17:22.480 --> 00:17:23.920 for the product. 182 00:17:23.920 --> 00:17:31.040 A loaf of bread does not cost a multi-millionaire a thousand times as much as it costs the 183 00:17:31.040 --> 00:17:32.680 average man. 184 00:17:32.680 --> 00:17:38.680 If indeed the market really behaved in this way, there would soon be no market, for there 185 00:17:38.680 --> 00:17:42.300 would be no advantage whatever in earning money. 186 00:17:42.300 --> 00:17:49.480 The more money one earned, the more, peru-pasu, the price of every good would be raised to 187 00:17:49.480 --> 00:17:50.480 him. 188 00:17:50.480 --> 00:17:59.480 Therefore, the entire civilized money economy and the system of production and division of labor based upon it would break down. 189 00:17:59.480 --> 00:18:15.480 Far from being neutral to the free market, then, a proportional income tax follows a principle which, if consistently applied, would eradicate the market economy and the entire monetary economy itself. 190 00:18:15.480 --> 00:18:28.480 It is clear, then, that equal taxation of everyone, the so-called head tax or poll tax, would be a far closer approach to the goal of neutrality. 191 00:18:28.480 --> 00:18:39.480 But even here, there are serious flaws in its neutrality, entirely apart from the ineluctable taxpayer-tax-consumer dichotomy. 192 00:18:39.480 --> 00:18:45.600 For one thing, goods and services on the free market are purchased only by those freely 193 00:18:45.600 --> 00:18:49.280 willing to obtain them at the market price. 194 00:18:49.280 --> 00:18:55.920 Since a tax is a compulsory levy rather than a free purchase, it can never be assumed that 195 00:18:55.920 --> 00:19:03.780 each and every member of society would, in a free market, pay this equal sum to the government. 196 00:19:03.780 --> 00:19:11.380 In fact, the very compulsory nature of taxation implies that far less revenue would be paid 197 00:19:11.380 --> 00:19:16.320 into the government were it conducted in a voluntary manner. 198 00:19:16.320 --> 00:19:22.540 Rather than being neutral, therefore, the equal tax would distort market results by 199 00:19:22.540 --> 00:19:30.020 imposing undue levies on at least three groups of citizens, the poor, the uninterested, and 200 00:19:30.020 --> 00:19:47.540 Another grave problem in treating the equal tax as akin to a free market price is that 201 00:19:47.540 --> 00:19:53.940 we do not know what services of government the people are supposed to be purchasing. 202 00:19:53.940 --> 00:19:59.980 For example, if the government uses the tax to subsidize a certain favored group, it is 203 00:19:59.980 --> 00:20:07.980 It is difficult to know what sort of service the payers of the head tax are reaping from this act of government. 204 00:20:07.980 --> 00:20:13.980 But let us take a seemingly clear-cut case of pure service, police protection, 205 00:20:13.980 --> 00:20:19.980 and let us assume that the head tax is being paid for this expenditure. 206 00:20:19.980 --> 00:20:24.980 The free market rule is that equal prices are paid for equal services. 207 00:20:24.980 --> 00:20:28.980 But what here is an equal service? 208 00:20:28.980 --> 00:20:34.900 Surely the service of police protection is of far greater magnitude in an urban crime 209 00:20:34.900 --> 00:20:40.560 center than it is in some sleepy backwater where crime is rare. 210 00:20:40.560 --> 00:20:46.200 Police protection will certainly cost more in the crime-ridden area, hence if it were 211 00:20:46.200 --> 00:20:51.740 supplied on the market, the price paid there would be higher than in the backwater. 212 00:20:51.740 --> 00:20:58.700 Furthermore, a person under particular threat of crime and who might require greater surveillance 213 00:20:58.700 --> 00:21:06.100 would have to pay a higher police fee. A uniform tax would be below market price in the dangerous 214 00:21:06.100 --> 00:21:13.300 areas and above it in the peaceful areas. To approach neutrality then, a tax would have 215 00:21:13.300 --> 00:21:20.140 to vary in accordance with the costs of services and not be uniform. 216 00:21:20.140 --> 00:21:27.660 We are not here conceding that costs determine prices. The general array of final prices 217 00:21:27.660 --> 00:21:34.740 Prices determines the general array of cost prices, but then the viability of firms is 218 00:21:34.740 --> 00:21:41.260 determined by whether the price that people will pay for their particular products will 219 00:21:41.260 --> 00:21:47.140 be enough to cover the costs which are determined throughout the market. 220 00:21:47.140 --> 00:21:52.780 This is the neglected cost principle of taxation. 221 00:21:52.780 --> 00:21:56.700 The cost principle, however, is hardly neutral either. 222 00:21:56.700 --> 00:22:04.180 Apart from the inexorable taxpayer-tax-consumer problem, there is, again, the problem of how 223 00:22:04.180 --> 00:22:08.120 a service is to be defined and isolated. 224 00:22:08.120 --> 00:22:15.220 What is the service of redistribution from Peter to Paul, and what is the cost for which 225 00:22:15.220 --> 00:22:17.820 Peter is to be assessed? 226 00:22:17.820 --> 00:22:23.520 And even if we confine the discussion to such common services as police protection, there 227 00:22:23.520 --> 00:22:25.640 are grave flaws. 228 00:22:25.640 --> 00:22:31.520 In the first place, the costs of government, as we shall see further, are bound to be much 229 00:22:31.520 --> 00:22:34.380 higher than those of the free market. 230 00:22:34.380 --> 00:22:42.340 Secondly, the state cannot calculate well, and therefore cannot gauge its costs accurately. 231 00:22:42.340 --> 00:22:47.800 Thirdly, costs are equal to prices only in equilibrium. 232 00:22:47.800 --> 00:22:54.280 Since the economy is never in equilibrium, costs are never a precise estimate of what 233 00:22:54.280 --> 00:22:57.580 the free market price would have been. 234 00:22:57.580 --> 00:23:05.780 And finally, as in the equal tax, and in contrast to the free market, the taxpayer never demonstrates 235 00:23:05.780 --> 00:23:08.760 his benefit from the governmental act. 236 00:23:08.760 --> 00:23:14.740 It is simply and blithely assumed that he would have purchased the service voluntarily 237 00:23:14.740 --> 00:23:17.560 at this price. 238 00:23:17.560 --> 00:23:23.680 Still another attempt at neutral taxation is the benefit principle, which states that 239 00:23:23.680 --> 00:23:30.000 a tax should be levied equal to the benefit which the individuals receive from the government 240 00:23:30.000 --> 00:23:31.320 service. 241 00:23:31.320 --> 00:23:37.260 It is not always realized what this principle would mean, for example, that recipients of 242 00:23:37.260 --> 00:23:39.260 of Government Welfare Benefits 243 00:24:07.260 --> 00:24:11.860 Like police protection, grave flaws still remain. 244 00:24:11.860 --> 00:24:17.700 Let us again disregard the persistent taxpayer-tax-consumer dichotomy. 245 00:24:17.700 --> 00:24:24.700 A fatal problem is that we cannot measure benefits or even know whether they exist. 246 00:24:24.700 --> 00:24:32.460 As in the head tax and cost principles, there is here no free market where people can demonstrate 247 00:24:32.460 --> 00:24:38.380 that they are receiving a benefit from the exchange greater than the value of the goods 248 00:24:38.380 --> 00:24:39.900 they surrender. 249 00:24:39.900 --> 00:24:46.020 In fact, since taxes are levied by coercion, it is clear that people's benefits from 250 00:24:46.020 --> 00:24:52.460 government are considerably less than the amount that they are required to pay, since, 251 00:24:52.460 --> 00:24:56.940 if left free, they would contribute less to government. 252 00:24:56.940 --> 00:25:03.340 The benefit, then, is simply assumed arbitrarily by government officials. 253 00:25:03.340 --> 00:25:10.100 Furthermore, even if the benefit were freely demonstrable, the benefit principle would 254 00:25:10.100 --> 00:25:13.740 not approach the process of the free market. 255 00:25:13.740 --> 00:25:21.140 For once again, individuals pay a uniform price for services on the free market, regardless 256 00:25:21.140 --> 00:25:24.740 of the extent of their subjective benefits. 257 00:25:24.740 --> 00:25:30.700 The man who would walk a mile for a camel pays no more ordinarily than the man who couldn't 258 00:25:30.700 --> 00:25:32.100 care less. 259 00:25:32.100 --> 00:25:38.880 To tax everyone in accordance with the benefit he receives, then, is diametrically opposed 260 00:25:38.880 --> 00:25:40.740 to the market principle. 261 00:25:40.740 --> 00:25:46.920 Finally, if everyone's benefit is taxed away, there would be no reason for him to make the 262 00:25:46.920 --> 00:25:50.960 exchange or to receive the government service. 263 00:25:50.960 --> 00:25:57.480 On the market, not all people, not even the marginal buyers, pay the full amount of their 264 00:25:57.480 --> 00:25:58.480 benefit. 265 00:25:58.480 --> 00:26:06.440 The supermarginal buyers obtain unmeasurable surplus benefit, and so do the marginal buyers, 266 00:26:06.440 --> 00:26:10.480 for without such a surplus they would not buy the product. 267 00:26:10.480 --> 00:26:17.160 Moreover, for such services as police protection, the benefit principle would require the poor 268 00:26:17.160 --> 00:26:23.440 for the Poor and the Infirm to pay more than the rich and the able, since the former may 269 00:26:23.440 --> 00:26:26.920 be said to benefit more from protection. 270 00:26:26.920 --> 00:26:33.900 Finally, it should be noted that if each person's benefit from government is to be taxed away, 271 00:26:33.900 --> 00:26:39.760 the bureaucrats who receive all their income from the government would have to return their 272 00:26:39.760 --> 00:26:45.240 whole salary to the government, and so serve without pay. 273 00:26:45.240 --> 00:26:51.600 Ever since Adam Smith, economists have tried fallaciously to use the benefit principle 274 00:26:51.600 --> 00:26:58.700 to justify proportional and even progressive taxation, on the ground that people benefit 275 00:26:58.700 --> 00:27:05.920 from society in proportion, or even more than in proportion, to their incomes. 276 00:27:05.920 --> 00:27:12.600 But it is clear that the rich benefit less from such services as police protection, since 277 00:27:12.600 --> 00:27:41.440 But it might be objected, can't we say that everyone derives proportional benefits to 278 00:27:41.440 --> 00:27:46.400 To His Income from Society, Though Not from Government? 279 00:27:46.400 --> 00:27:49.400 In the first place, this cannot be established. 280 00:27:49.400 --> 00:27:53.320 In fact, the opposite argument would be more accurate. 281 00:27:53.320 --> 00:28:00.560 For since both A and B participate in society and its benefits, any differential income 282 00:28:00.560 --> 00:28:08.640 between A and B must be due to their own particular worths, rather than to society. 283 00:28:08.640 --> 00:28:15.800 Certainly, equal benefits from society cannot be used to imply a proportional tax. 284 00:28:15.800 --> 00:28:22.160 And furthermore, even if the argument were true, by what ledger domain can we say that 285 00:28:22.160 --> 00:28:25.680 society is equivalent to the state? 286 00:28:25.680 --> 00:28:34.080 If A, B, C, producers on the market, benefit from each other's existence as society, 287 00:28:34.080 --> 00:28:42.880 How can G, the government, use this fact to establish its claim to their wealth? 288 00:28:42.880 --> 00:28:50.000 We have thus seen that no principle of taxation can be neutral with respect to the free market. 289 00:28:50.000 --> 00:28:56.760 Progressive taxation, where each man pays more than proportionately to his income, of 290 00:28:56.760 --> 00:29:00.160 course makes no attempt at neutrality. 291 00:29:00.160 --> 00:29:06.760 If the proportional tax embodies a principle destructive to the entire market economy and 292 00:29:06.760 --> 00:29:13.280 the monetary economy itself, then the progressive tax does so still more. 293 00:29:13.280 --> 00:29:19.680 For the progressive tax penalizes the able and efficient in even greater proportion than 294 00:29:19.680 --> 00:29:23.720 their relative ability and efficiency. 295 00:29:23.720 --> 00:29:30.940 Progressive rates are a particular disincentive against especially able work or entrepreneurship, 296 00:29:30.940 --> 00:29:37.860 and since such ability is engaged in serving the consumer, a progressive tax levies a particular 297 00:29:37.860 --> 00:29:41.520 burden on the consumers as well. 298 00:29:41.520 --> 00:29:48.380 In addition to the two ways discussed by which income taxation penalizes saving, the progressive 299 00:29:48.380 --> 00:29:56.340 of Tax imposes an added penalty, for empirically, in most cases, the wealthy save and invest 300 00:29:56.340 --> 00:30:01.880 proportionately more of their incomes than the lower income groups. 301 00:30:01.880 --> 00:30:08.820 There is, however, no apodictic, praxeological reason why this must always be so. 302 00:30:08.820 --> 00:30:14.300 The rule would not hold, for example, in a country where the wealthy bought jewelry while 303 00:30:14.300 --> 00:30:21.020 While the poor thriftily saved and invested, while the progressive principle is certainly 304 00:30:21.020 --> 00:30:28.580 highly destructive of the market, most conservative pro-free market economists tend to overweigh 305 00:30:28.580 --> 00:30:35.960 its effects and to underweigh the destructive effects of proportional taxation. 306 00:30:35.960 --> 00:30:42.080 Proportional income taxation has many of the same consequences and therefore the level 307 00:30:42.080 --> 00:30:49.520 of Income Taxation is generally more important for the market than the degree of progressivity. 308 00:30:49.520 --> 00:30:58.600 Thus, Society A may have a proportional income tax requiring every man to pay 50% of his 309 00:30:58.600 --> 00:30:59.600 income. 310 00:30:59.600 --> 00:31:08.020 Society B may have a very steeply progressive tax requiring a poor man to pay ΒΌ% and the 311 00:31:08.020 --> 00:31:11.940 richest man 10% of his income. 312 00:31:11.940 --> 00:31:20.060 The rich man will certainly prefer society be, even though the tax is progressive, demonstrating 313 00:31:20.060 --> 00:31:26.540 that it is not so much the progressivity as the height of his tax that burdens the rich 314 00:31:26.540 --> 00:31:27.540 man. 315 00:31:27.540 --> 00:31:36.220 Incidentally, the poor producer, with a lower tax upon him, will also prefer society be. 316 00:31:36.220 --> 00:31:41.340 This demonstrates the fallacy in the common conservative complaint against progressive 317 00:31:41.340 --> 00:31:46.660 taxation that it is a means for the poor to rob the rich. 318 00:31:46.660 --> 00:31:53.180 For both the poor man and the rich man have, in our example, chosen progression. 319 00:31:53.180 --> 00:31:59.180 The reason is that the poor do not rob the rich under progressive taxation. 320 00:31:59.180 --> 00:32:06.860 Instead, it is the state that robs both through taxation, whether proportional or progressive. 321 00:32:08.060 --> 00:32:14.380 It may be objected that the poor benefit from the state's expenditures and subsidies from the tax 322 00:32:14.380 --> 00:32:21.100 proceeds, and thus do their robbing indirectly. But this overlooks the fact that the state can 323 00:32:21.100 --> 00:32:27.660 spend its money in many different ways. It may consume the products of specific industries. 324 00:32:27.660 --> 00:32:31.300 It may subsidize some or all of the rich. 325 00:32:31.300 --> 00:32:34.680 It may subsidize some or all of the poor. 326 00:32:34.680 --> 00:32:42.320 The fact of progressivity does not in itself imply that the poor are being subsidized en 327 00:32:42.320 --> 00:32:43.320 masse. 328 00:32:43.320 --> 00:32:49.360 Indeed, if some of the poor are being subsidized, others will probably not be. 329 00:32:49.360 --> 00:32:55.520 And so these latter net taxpayers will be robbed along with the rich. 330 00:32:55.520 --> 00:33:02.680 In fact, since there are usually far more poor than rich, the poor en masse may very 331 00:33:02.680 --> 00:33:08.680 well bear the greatest burden of even a progressive tax system. 332 00:33:08.680 --> 00:33:15.480 Of all the possible types of taxes, the one most calculated to cripple and destroy the 333 00:33:15.480 --> 00:33:20.600 workings of the market is the excess profits tax. 334 00:33:20.600 --> 00:33:28.320 For of all productive incomes, profits are a relatively small sum with enormous significance 335 00:33:28.320 --> 00:33:29.840 and impact. 336 00:33:29.840 --> 00:33:35.900 They are the motor, the driving force of the entire market economy. 337 00:33:35.900 --> 00:33:41.800 Profit and loss signals are the prompters of the entrepreneurs and capitalists who direct 338 00:33:41.800 --> 00:33:50.280 and ever redirect the productive resources of society in the best possible ways and combinations 339 00:33:50.280 --> 00:33:56.480 to satisfy the changing desires of consumers under changing conditions. 340 00:33:56.480 --> 00:34:03.400 With the drive for profit crippled, profit and loss no longer serve as an effective incentive 341 00:34:03.400 --> 00:34:10.600 or, therefore, as the means for economic calculation in the market economy. 342 00:34:10.600 --> 00:34:17.320 It is curious that in wartime, precisely when it would seem most urgent to preserve an efficient 343 00:34:17.320 --> 00:34:24.800 Productive System, the cry invariably goes up for taking the profits out of war. 344 00:34:24.800 --> 00:34:31.960 This zeal never seems to apply so harshly to the clearly war-born profits of steel workers 345 00:34:31.960 --> 00:34:37.140 in higher wages, only to the profits of entrepreneurs. 346 00:34:37.140 --> 00:34:41.160 There is certainly no better way of crippling a war effort. 347 00:34:41.160 --> 00:34:48.720 In addition, the excess concept requires some sort of norm above which the profit can be 348 00:34:48.720 --> 00:34:49.720 taxed. 349 00:34:49.720 --> 00:34:55.680 This norm may either be a certain rate of profit, which involves the numerous difficulties 350 00:34:55.680 --> 00:35:02.880 of measuring profit and capital investment in every firm, or it may refer to profits 351 00:35:02.880 --> 00:35:06.520 at a base period before the war started. 352 00:35:06.520 --> 00:35:13.520 The latter, the general favorite because it specifically taps war profits, makes the economy 353 00:35:13.520 --> 00:35:21.160 even more chaotic, for it means that while the government strains for more war production, 354 00:35:21.160 --> 00:35:29.200 the excess profits tax creates every incentive toward lower and inefficient war production. 355 00:35:29.200 --> 00:35:37.720 In short, the E.P.T. tends to freeze the process of production as of the peacetime base period, 356 00:35:37.720 --> 00:35:44.720 and the longer the war lasts, the more obsolete, the more inefficient and absurd the base period 357 00:35:44.720 --> 00:35:47.960 structure becomes. 358 00:35:47.960 --> 00:35:54.440 C. Shifting and Incidence, Attacks on an Industry 359 00:35:54.440 --> 00:36:00.880 No discussion of taxation, however brief, can overlook the famous problem of the shifting 360 00:36:00.880 --> 00:36:04.080 and incidence of taxation. 361 00:36:04.080 --> 00:36:06.600 In brief, who pays a tax? 362 00:36:06.600 --> 00:36:08.720 The person on whom it is levied? 363 00:36:08.720 --> 00:36:14.240 Or someone else, to whom the former is able to shift the tax? 364 00:36:14.240 --> 00:36:20.780 There are still economists, incredibly, who hew to the old 19th century equal diffusion 365 00:36:20.780 --> 00:36:27.300 and The Theory of Taxation, which simply closes the problem by proclaiming that all taxes 366 00:36:27.300 --> 00:36:34.100 are shifted to everyone, so that there is no need to analyze each one in particular. 367 00:36:34.100 --> 00:36:40.420 This obscurantist tendency is fostered by treating shifting in too broad a way. 368 00:36:40.420 --> 00:36:48.620 Thus, if an income tax is levied on Jones at 80%, this will hurt not only Jones, but 369 00:36:48.620 --> 00:36:55.620 but also, by decreasing Jones' incentives as well as capacities, other consumers, by 370 00:36:55.620 --> 00:36:58.900 reducing Jones' work and savings. 371 00:36:58.900 --> 00:37:06.500 It is therefore true that the effects of taxation diffuse outward from the center of the target. 372 00:37:06.500 --> 00:37:12.900 But this is far from saying that Jones can simply shift the tax burden onto the shoulders 373 00:37:12.900 --> 00:37:14.100 of others. 374 00:37:14.100 --> 00:37:20.860 The concept of shifting will here be limited to the case where the payment of a tax can 375 00:37:20.860 --> 00:37:28.740 be directly transferred from the original payer to someone else and will not be used 376 00:37:28.740 --> 00:37:34.020 when others suffer in addition to the original taxpayer. 377 00:37:34.020 --> 00:37:40.060 The latter may be called the indirect effects of the tax. 378 00:37:40.060 --> 00:37:46.240 The first rule of shifting is that an income tax cannot be shifted. 379 00:37:46.240 --> 00:37:52.060 This formerly accepted truth in economics is now countered with the popular assumption 380 00:37:52.060 --> 00:37:59.740 that, for example, a tax on wages will spur unions to demand higher wages to compensate 381 00:37:59.740 --> 00:38:07.500 for the tax, and that therefore the tax on wages is shifted forward onto the employer, 382 00:38:07.500 --> 00:38:13.100 Who, in turn, shifts it again forward onto the body of consumers. 383 00:38:13.100 --> 00:38:20.440 And yet, almost every step in this commonly proclaimed sequence is an egregious fallacy. 384 00:38:20.440 --> 00:38:27.000 It is absurd in the first place to think that workers or unions wait quietly for a tax to 385 00:38:27.000 --> 00:38:30.400 galvanize them into making demands. 386 00:38:30.400 --> 00:38:33.840 Workers always want higher wages. 387 00:38:33.840 --> 00:38:36.300 Unions always demand more. 388 00:38:36.300 --> 00:38:39.500 The question is, will they get more? 389 00:38:39.500 --> 00:38:42.580 There is no reason to think that they can. 390 00:38:42.580 --> 00:38:49.600 A worker can get only the value of the discounted marginal productivity of his labor. 391 00:38:49.600 --> 00:38:55.660 No clamor will raise that productivity, and therefore none can raise the wage he earns 392 00:38:55.660 --> 00:38:57.780 from his employer. 393 00:38:57.780 --> 00:39:01.820 Union demands for higher wages will be treated as usual. 394 00:39:01.820 --> 00:39:08.220 is, they can be satisfied only at the cost of the unemployment of some of the workforce 395 00:39:08.220 --> 00:39:10.020 in that industry. 396 00:39:10.020 --> 00:39:14.880 But this is true whether or not there has been a tax on wages. 397 00:39:14.880 --> 00:39:21.140 The tax will have nothing to do with the final wage set on the market. 398 00:39:21.140 --> 00:39:28.780 The idea that the increased cost will be passed on to the consumer by the employer is an illustration 399 00:39:28.780 --> 00:39:36.740 of Perhaps the Single Most Widespread Fallacy on Taxation that Businessmen can simply shift 400 00:39:36.740 --> 00:39:43.620 their higher costs forward onto the consumers in the form of higher prices. 401 00:39:43.620 --> 00:39:49.780 All the economic theory expounded in this book shows the error of this doctrine, for 402 00:39:49.780 --> 00:39:56.100 the price of a given product is set by the demand schedules of the consumers. 403 00:39:56.100 --> 00:40:04.180 There is nothing in higher costs or higher taxes which, per se, increases these schedules. 404 00:40:04.180 --> 00:40:12.340 Hence, any change in selling prices, whether higher or lower, will decrease the revenues 405 00:40:12.340 --> 00:40:14.580 of the business involved. 406 00:40:14.580 --> 00:40:21.980 For each business on the market tends to be at all times at its maximum profit point in 407 00:40:21.980 --> 00:40:24.800 relation to the consumers. 408 00:40:24.800 --> 00:40:30.640 Those are already at their point of maximum return for the business, therefore higher 409 00:40:30.640 --> 00:40:38.080 taxes or other costs imposed on the firm will reduce their net incomes rather than 410 00:40:38.080 --> 00:40:42.600 be smoothly and easily passed on to consumers. 411 00:40:42.600 --> 00:40:46.400 We thus arrive at this significant conclusion. 412 00:40:46.400 --> 00:40:53.880 No tax, not just an income tax, can ever be shifted forward. 413 00:40:53.880 --> 00:41:00.940 Notice that a particularly heavy tax of whatever type has been laid on a specific industry, 414 00:41:00.940 --> 00:41:03.040 say the liquor industry. 415 00:41:03.040 --> 00:41:04.980 What will be the effects? 416 00:41:04.980 --> 00:41:11.960 As we have noted, the tax will not simply be passed on to the consumers. 417 00:41:11.960 --> 00:41:18.440 Businessmen are particularly prone to this passing-on argument, obviously in an attempt 418 00:41:18.440 --> 00:41:25.160 to Convince Consumers that they are really paying any tax on that industry. 419 00:41:25.160 --> 00:41:31.600 Yet the argument is clearly belied by the very zeal of each industry to have its taxes 420 00:41:31.600 --> 00:41:35.900 lowered and to fight against a tax increase. 421 00:41:35.900 --> 00:41:42.640 If taxes could really be shifted so easily and businessmen were simply unpaid collection 422 00:41:42.640 --> 00:41:48.120 agents for the government, they would never protest a tax on their industry. 423 00:41:48.120 --> 00:41:54.880 Perhaps this is the reason why almost no businessmen have protested being collection agents for 424 00:41:54.880 --> 00:41:58.440 withholding taxes on their workers. 425 00:41:58.440 --> 00:42:02.780 Instead, the price of liquor will remain the same. 426 00:42:02.780 --> 00:42:06.680 The net income of the firms will decline. 427 00:42:06.680 --> 00:42:12.680 This will mean that returns will be lower to capital and enterprise in liquor than in 428 00:42:12.680 --> 00:42:15.740 other industries of the economy. 429 00:42:15.740 --> 00:42:21.660 All liquor firms will suffer losses and go out of business, and in general productive 430 00:42:21.660 --> 00:42:27.860 resources of all types will flow out of liquor and into other industries. 431 00:42:27.860 --> 00:42:34.860 The long-run effect, therefore, is to decrease the supply of liquor produced, and therefore 432 00:42:34.860 --> 00:42:41.020 by the law of supply and demand to raise the price of liquor on the market. 433 00:42:41.020 --> 00:42:48.380 However, as we have said before, this process, this diffusion of suffering over the economy, 434 00:42:48.380 --> 00:42:50.820 is hardly shifting. 435 00:42:50.820 --> 00:42:58.380 For the tax is not simply passed on, it only permeates to the consumers through hurting 436 00:42:58.380 --> 00:43:00.640 the industry taxed. 437 00:43:00.640 --> 00:43:05.460 The final result will be a distortion of the factors of production. 438 00:43:05.460 --> 00:43:11.820 Your goods are now being produced than the consumers would prefer in the liquor industry, 439 00:43:11.820 --> 00:43:18.140 and too many goods, relatively to liquor, are being produced in the other industry. 440 00:43:18.140 --> 00:43:24.900 Taxes, in short, can more readily be shifted backward than forward. 441 00:43:24.900 --> 00:43:31.460 Strictly the result is not shifting because it is not a painless process, but it is clear 442 00:43:31.460 --> 00:43:37.360 Remember that the backward process, backward to the factors of production, happens more 443 00:43:37.360 --> 00:43:45.160 quickly and directly than the effects on consumers, for losses or lowered profits to liquor firms 444 00:43:45.160 --> 00:43:52.520 will immediately lower their demand for land, labor and capital factors of production. 445 00:43:52.520 --> 00:43:58.800 This falling of demand schedules will lower wages and rents earned in the liquor industry, 446 00:43:58.800 --> 00:44:05.600 These lower earnings will induce a shift of labor, land and capital out of liquor and 447 00:44:05.600 --> 00:44:07.680 into other industries. 448 00:44:07.680 --> 00:44:13.800 The rapid backward shifting is in harmony with the Austrian theory of consumption and 449 00:44:13.800 --> 00:44:20.880 production developed in this volume, for prices of factors are determined by the selling prices 450 00:44:20.880 --> 00:44:27.760 of the goods which they produce, and not vice versa, which would have to be the conclusion 451 00:44:27.760 --> 00:44:32.320 Doctrine of the Naive Shifting Forward Doctrine 452 00:44:32.320 --> 00:44:38.840 It should be noted that in some cases the industry itself can welcome a tax upon it, 453 00:44:38.840 --> 00:44:45.880 for the sake of conferring an indirect but effective monopolistic privilege on the supermarginal 454 00:44:45.880 --> 00:44:46.880 firms. 455 00:44:46.880 --> 00:44:54.480 Thus, a flat license tax will confer a particular privilege on the more heavily capitalized 456 00:44:54.480 --> 00:45:05.680 D. Shifting and Incidence, a General Sales Tax 457 00:45:05.680 --> 00:45:13.400 The most popular example of a tax supposedly shifted forward is the general sales tax. 458 00:45:13.400 --> 00:45:21.780 Surely, for example, if the government imposes a uniform 20% tax on all retail sales, and 459 00:45:21.780 --> 00:45:27.540 And if we can make the simplifying assumption that the tax can be equally well enforced 460 00:45:27.540 --> 00:45:36.080 everywhere, then business will simply pass on the 20% increase in all prices to consumers. 461 00:45:36.080 --> 00:45:41.840 In fact, however, there is no way for prices to increase at all. 462 00:45:41.840 --> 00:45:48.820 As in the case of one particular industry, prices were previously set, or approximately 463 00:45:48.820 --> 00:45:54.100 So, at the points of maximum net revenue for the firms. 464 00:45:54.100 --> 00:46:00.380 Stocks of goods or factors have not yet changed and neither have demand schedules. 465 00:46:00.380 --> 00:46:03.220 How then could prices rise? 466 00:46:03.220 --> 00:46:09.140 Moreover, if we look at the general array of prices, as is proper when dealing with 467 00:46:09.140 --> 00:46:15.860 a general sales tax, these are determined by the supply of and the demand for money 468 00:46:15.860 --> 00:46:19.100 from the goods and money sides. 469 00:46:19.100 --> 00:46:25.620 For the general array of prices to rise, there must be either an increase in the supply of 470 00:46:25.620 --> 00:46:31.320 money, a decrease in the demand schedule for money, or both. 471 00:46:31.320 --> 00:46:37.380 Nothing in a general sales tax causes a change in either of these determinants. 472 00:46:37.380 --> 00:46:43.620 It might be objected that the firms can pass along the sales tax because it is a general 473 00:46:43.620 --> 00:46:46.160 Tax Increase for All Firms 474 00:46:46.160 --> 00:46:53.940 Aside from the fact that no relevant general factor, supply, demand for money, has increased, 475 00:46:53.940 --> 00:47:01.260 the individual firm is still concerned only with its individual demand, and this has not 476 00:47:01.260 --> 00:47:02.260 shifted. 477 00:47:02.260 --> 00:47:09.940 A tax increase has done nothing to make a higher price more profitable than it was before. 478 00:47:09.940 --> 00:47:20.940 Furthermore, the long-run effects of a general sales tax on prices will be smaller than in the case of an equivalent partial excise tax. 479 00:47:20.940 --> 00:47:35.940 A tax on a specific industry, such as liquor, will push resources out of this industry and into others, and therefore the relative price of the taxed commodity will eventually rise. 480 00:47:35.940 --> 00:47:44.940 In a general, uniformly enforced sales tax, however, there is no room for such shifts of resources. 481 00:47:44.940 --> 00:47:50.940 Resources can now shift only from work into idleness or into barter. 482 00:47:50.940 --> 00:47:59.940 This, of course, may and probably will happen, since, as we shall see further, a sales tax is a tax on incomes. 483 00:47:59.940 --> 00:48:10.940 The rise in opportunity cost of leisure may push some workers into idleness and thereby lower the quantity of goods produced. 484 00:48:10.940 --> 00:48:21.940 To this extent prices will eventually rise, although hardly in the smooth, immediate, proportionate way of shifting. 485 00:48:21.940 --> 00:48:38.940 The myth that a sales tax can be shifted forward is comparable to the myth that a general union-imposed wage increase can be shifted forward to higher prices for consumers, thereby causing inflation. 486 00:48:38.940 --> 00:48:50.940 There is here no way that the general array of prices can rise, and the only possible result of such a wage increase is mass unemployment. 487 00:48:50.940 --> 00:48:59.040 Of course, if the money supply is increased after a wage rise and credit expanded, prices 488 00:48:59.040 --> 00:49:06.020 can be raised so that money wages are again not above their discounted marginal value 489 00:49:06.020 --> 00:49:08.460 products. 490 00:49:08.460 --> 00:49:14.220 In considering the general sales tax, many people are misled by the fact that the price 491 00:49:14.220 --> 00:49:19.820 paid by the consumer necessarily includes the tax. 492 00:49:19.820 --> 00:49:26.960 If someone goes to a movie and pays $1 admission, and if he sees prominently posted the information 493 00:49:26.960 --> 00:49:35.020 that this covers a price of 85 cents and a tax of 15 cents, he tends to conclude that 494 00:49:35.020 --> 00:49:39.920 the tax has simply been added on to the price. 495 00:49:39.920 --> 00:49:48.600 But $1 is the price, not 85 cents, the latter sum simply being the revenue accruing to the 496 00:49:48.600 --> 00:49:59.400 The Revenue to the Firm has, in effect, been reduced to allow for payment of taxes. 497 00:49:59.400 --> 00:50:03.640 This is precisely the consequence of a general sales tax. 498 00:50:03.640 --> 00:50:10.280 Its immediate impact lowers the gross revenue of firms by the amount of the tax. 499 00:50:10.280 --> 00:50:14.720 In the long run, of course, firms cannot pay the tax. 500 00:50:14.720 --> 00:50:22.000 The loss in gross revenue of firms being imputed backward to interest income by capitalists 501 00:50:22.000 --> 00:50:29.420 and to wages and rents earned by owners of original factors, labor and ground land. 502 00:50:29.420 --> 00:50:37.140 A decrease in gross revenue to retail firms is reflected back to a decreased demand for 503 00:50:37.140 --> 00:50:41.100 the products of all the higher order firms. 504 00:50:41.100 --> 00:50:48.020 The major result of a general sales tax is a general reduction in the net revenues accruing 505 00:50:48.020 --> 00:50:50.320 to original factors. 506 00:50:50.320 --> 00:50:57.740 The sales tax has been shifted backwards to original factor returns, to interest and to 507 00:50:57.740 --> 00:51:00.660 all wages and ground rents. 508 00:51:00.660 --> 00:51:08.020 No longer does every original factor of production earn its discounted marginal product. 509 00:51:08.020 --> 00:51:16.300 General factors now earn less than their DMVPs, the reduction consisting of the sales tax 510 00:51:16.300 --> 00:51:18.780 paid to the government. 511 00:51:18.780 --> 00:51:24.840 Let us now integrate this analysis of the incidence of a general sales tax with our 512 00:51:24.840 --> 00:51:30.620 previous general analysis of the benefits and burdens of taxation. 513 00:51:30.620 --> 00:51:37.340 This is accomplished by remembering that the proceeds of taxation are, in turn, spent by 514 00:51:37.340 --> 00:51:38.940 by the Government. 515 00:51:38.940 --> 00:51:45.060 Whether or not the Government spends the money for resources for its own activities, or simply 516 00:51:45.060 --> 00:51:52.920 transfers the money to people it subsidizes, the effect is to shift consumption and investment 517 00:51:52.920 --> 00:51:59.580 demand from private hands to the Government, or to Government-supported individuals by 518 00:51:59.580 --> 00:52:02.420 the amount of the tax revenue. 519 00:52:02.420 --> 00:52:09.660 The tax has been ultimately levied on the incomes of original factors and the money transferred 520 00:52:09.660 --> 00:52:12.680 from their hands to the government. 521 00:52:12.680 --> 00:52:18.680 The income of the government and of those subsidized by the government has been increased 522 00:52:18.680 --> 00:52:25.600 at the expense of the tax producers, and therefore consumption and investment demands on the 523 00:52:25.600 --> 00:52:32.600 have been shifted from the producers to the expropriators by the amount of the tax. 524 00:52:32.600 --> 00:52:38.600 As a consequence, the value of the monetary unit will remain unchanged, 525 00:52:38.600 --> 00:52:45.600 barring a difference in demands for money between the taxpayers and the tax consumers. 526 00:52:45.600 --> 00:52:51.600 But the array of prices will shift in accordance with the shift in demands. 527 00:52:51.600 --> 00:52:57.920 Thus, if the market has been spending heavily on clothing, and the government uses the revenue 528 00:52:57.920 --> 00:53:04.840 mostly for the purchase of arms, there will be a fall in the price of clothes and a rise 529 00:53:04.840 --> 00:53:12.280 in the price of arms, and a tendency for non-specific factors to shift out of the production of 530 00:53:12.280 --> 00:53:17.000 clothing and into the production of armaments. 531 00:53:17.000 --> 00:53:24.320 As a result, there will not finally be, as might be assumed, a proportional 20% fall 532 00:53:24.320 --> 00:53:32.320 in all original factor incomes as the result of a 20% general sales tax. 533 00:53:32.320 --> 00:53:38.640 Specific factors in industries that have lost business from the shift from private to governmental 534 00:53:38.640 --> 00:53:43.920 demand will lose proportionately more in income. 535 00:53:43.920 --> 00:53:50.040 Non-specific factors in industries gaining in demand will lose proportionately less. 536 00:53:50.040 --> 00:53:56.400 Some may gain so much as to gain absolutely from the change. 537 00:53:56.400 --> 00:54:01.800 Non-specific factors will not be affected as much proportionately, but they too will 538 00:54:01.800 --> 00:54:08.520 lose and gain according to the difference that the concrete shift in demand makes in 539 00:54:08.520 --> 00:54:12.200 their marginal value productivity. 540 00:54:12.200 --> 00:54:19.520 It should be carefully noted that the general sales tax is a conspicuous example of failure 541 00:54:19.520 --> 00:54:21.700 to tax consumption. 542 00:54:21.700 --> 00:54:29.560 The sales tax is commonly supposed to penalize consumption rather than income or capital. 543 00:54:29.560 --> 00:54:37.040 Yet we find that the sales tax reduces not just consumption, but the incomes of original 544 00:54:37.040 --> 00:54:38.040 factors. 545 00:54:38.040 --> 00:54:46.080 The general sales tax is therefore an income tax, albeit a rather haphazard one. 546 00:54:46.080 --> 00:54:53.640 Many right-wing economists have advocated general sales taxation as opposed to income taxation 547 00:54:53.640 --> 00:55:00.320 on the grounds that the former taxes consumption but not savings investment. 548 00:55:00.320 --> 00:55:06.460 Many left-wing economists have opposed sales taxation for the same reason. 549 00:55:06.460 --> 00:55:08.040 Both are mistaken. 550 00:55:08.040 --> 00:55:15.340 The sales tax is an income tax, though of a more haphazard and uncertain incidence. 551 00:55:15.340 --> 00:55:21.520 The major effect of the general sales tax will be that of the income tax, to reduce 552 00:55:21.520 --> 00:55:27.340 the consumption and the saving investment of the taxpayers. 553 00:55:27.340 --> 00:55:34.220 Mr. Frank Chotirov in his The Income Tax, Root of All Evil, fails to indicate what other 554 00:55:34.220 --> 00:55:39.820 Another type of tax would be better, from a free market point of view, than the income 555 00:55:39.820 --> 00:55:40.860 tax. 556 00:55:40.860 --> 00:55:47.100 It is clear from our discussion that there are few taxes indeed that will not be as bad 557 00:55:47.100 --> 00:55:51.820 as the income tax from the viewpoint of the free market. 558 00:55:51.820 --> 00:55:56.620 Certainly sales or excise taxation will not fill the bill. 559 00:55:56.620 --> 00:56:04.100 Mr. Chaturov furthermore is surely wrong when he terms income and inheritance taxes unique 560 00:56:04.100 --> 00:56:07.620 Denials of the Right of Individual Property 561 00:56:07.620 --> 00:56:14.740 Any tax whatever infringes on property right, and there is nothing in an indirect tax which 562 00:56:14.740 --> 00:56:21.940 makes the infringement any less clear. It is true that an income tax forces the subject to keep 563 00:56:21.940 --> 00:56:28.740 records and disclose his personal dealings, thus imposing a further loss in his utility. 564 00:56:28.740 --> 00:56:45.740 The sales tax, however, also forces record-keeping. The difference, again, is one of degree rather than of kind, since here the directness covers only retail storekeepers instead of the bulk of the population. 565 00:56:45.740 --> 00:57:10.740 In fact, since, as we have seen, the income tax, by its nature, falls more heavily on savings investment than on consumption, we reach the paradoxical and important conclusion that a tax on consumption will fall more heavily on savings investment than on consumption in its ultimate incidence. 566 00:57:10.740 --> 00:57:15.740 E. A Tax on Land Values 567 00:57:15.740 --> 00:57:22.740 Wherever taxes fall, they blight, hamper and distort the productive activity of the market. 568 00:57:22.740 --> 00:57:28.740 Clearly, a tax on wages will distort the allocation of labor effort. 569 00:57:28.740 --> 00:57:33.740 A tax on profits will cripple the profit and loss motor of the economy. 570 00:57:33.740 --> 00:57:38.740 A tax on interest will tend to consume capital, etc. 571 00:57:38.740 --> 00:57:59.240 One commonly conceded exception to this rule is the doctrine of Henry George, that ground landowners perform no productive function, and that therefore the government may safely tax site value without reducing the supply of productive services on the market. 572 00:57:59.240 --> 00:58:07.240 This is the economic, as distinguished from the moral, rationale for the famous single tax. 573 00:58:07.240 --> 00:58:12.240 Unhappily, very few economists have challenged this basic assumption, 574 00:58:12.240 --> 00:58:18.240 the single tax proposal being generally rejected on grounds purely pragmatic. 575 00:58:18.240 --> 00:58:25.240 There is no way and practice of distinguishing sight from improvement value of land. 576 00:58:25.240 --> 00:58:32.640 Or, conservative, too much has been invested in land to expropriate the landowners now. 577 00:58:32.640 --> 00:58:38.440 Thus, even so eminent an economist as F. A. Hayek has recently written, 578 00:58:38.440 --> 00:58:49.840 this scheme, the single tax, for the socialization of land, is, in its logic, probably the most seductive and plausible of all socialist schemes, 579 00:58:49.840 --> 00:58:54.240 if the factual assumptions on which it is based were correct, 580 00:58:54.240 --> 00:59:10.240 That is, if it were possible to distinguish clearly between the value of the permanent and indestructible powers of the soil and the value due to improvement, the argument for its adoption would be very strong. 581 00:59:10.240 --> 00:59:15.880 Yet, this central Georgist contention is completely fallacious. 582 00:59:15.880 --> 00:59:21.520 The owner of ground land performs a very important productive service. 583 00:59:21.520 --> 00:59:29.860 He finds, brings into use, and then allocates land sites to the most value-productive bidders. 584 00:59:29.860 --> 00:59:36.640 We must not be misled by the fact that the physical stock of land is fixed at any given 585 00:59:36.640 --> 00:59:37.640 time. 586 00:59:37.640 --> 00:59:57.640 In the case of land as of other material goods, it is not just the physical good that is being sold, but a whole bundle of services along with it, among which is the service of transferring ownership from seller to buyer, and doing so efficiently. 587 00:59:57.640 --> 01:00:05.440 Ground land does not simply exist, it must be served to, the user, by the owner. 588 01:00:05.440 --> 01:00:12.160 One man, of course, can perform both functions when the land is vertically integrated. 589 01:00:12.160 --> 01:00:18.540 The land owner earns the highest ground rents by allocating land sites to their most value 590 01:00:18.540 --> 01:00:25.060 productive uses, that is, to those uses most desired by consumers. 591 01:00:25.060 --> 01:00:31.680 In particular, we must not overlook the importance of location and the productive service of 592 01:00:31.680 --> 01:00:39.160 the site owner in assuring the most productive locations for each particular use. 593 01:00:39.160 --> 01:00:45.700 The view that bringing sites into use and deciding upon their location is not really 594 01:00:45.700 --> 01:00:52.840 productive is a vestige from the old classical view that a service which does not tangibly 595 01:00:52.840 --> 01:00:58.520 create something physical is not really productive. 596 01:00:58.520 --> 01:01:04.960 I do not know anyone who has brought out the productivity of landowners as clearly as Mr. 597 01:01:04.960 --> 01:01:08.280 Spencer Heath, an ex-Georgist. 598 01:01:08.280 --> 01:01:15.480 Heath comments on Henry George as follows, Wherever the services of landowners are concerned, 599 01:01:15.480 --> 01:01:22.480 he is firm in his dictum that all values are physical, in the exchange services performed 600 01:01:22.480 --> 01:01:29.200 by Landowners, their social distribution of sites and resources, no physical production 601 01:01:29.200 --> 01:01:30.200 is involved. 602 01:01:30.200 --> 01:01:36.920 Hence, he is unable to see that they are entitled to any share in the distribution of physical 603 01:01:36.920 --> 01:01:44.200 things, and that the rent they receive is but recompense for their non-coercive distributive 604 01:01:44.200 --> 01:01:46.800 or exchange services. 605 01:01:46.800 --> 01:01:53.680 He rules out all creation of values by the services performed in land distribution by 606 01:01:53.680 --> 01:02:01.280 free contract and exchange, which is the sole alternative to either a violent and disorderly 607 01:02:01.280 --> 01:02:06.600 or an arbitrary and tyrannical distribution of land. 608 01:02:06.600 --> 01:02:13.920 Actually, the function of bringing sites into use and deciding upon their location is just 609 01:02:13.920 --> 01:02:36.800 In this necessarily hasty overview of the high spots of taxation theory, we have space 610 01:02:36.800 --> 01:02:43.720 for only one more comment, a criticism of the very common view that, in a business boom, 611 01:02:43.720 --> 01:02:50.600 The government should increase taxation in order to sop up excess purchasing power and 612 01:02:50.600 --> 01:02:55.320 thereby halt the inflation and stabilize the economy. 613 01:02:55.320 --> 01:03:01.240 We shall discuss the problems of inflation, stabilization and the business cycle later. 614 01:03:01.240 --> 01:03:09.800 Here, let us note the oddity of assuming that a tax is somehow less of a social cost, less 615 01:03:09.800 --> 01:03:12.880 of a burden than a price. 616 01:03:12.880 --> 01:03:20.400 Thus suppose in a boom that Messers A, B and C, with the money they have on hand, would 617 01:03:20.400 --> 01:03:27.280 spend a certain amount on some commodity, say pipes, at a certain market price, for 618 01:03:27.280 --> 01:03:30.020 example, $10 per pipe. 619 01:03:30.020 --> 01:03:35.480 The government decides that this is a most unfortunate situation, that the market price 620 01:03:35.480 --> 01:03:48.480 The price is, by some arbitrary, undivulged standard, too high, and that therefore it must help its subjects by taxing their money away from them, and thus lowering prices. 621 01:03:48.480 --> 01:03:57.480 Suppose, indeed, that A, B and C are taxed sufficiently to lower the pipe price to, say, $8. 622 01:03:57.480 --> 01:04:16.600 In short, the tax price has gone up in order that the prices of other goods may decline. 623 01:04:16.600 --> 01:04:25.360 Why is a voluntary price, paid willingly by buyers and accepted by sellers, somehow bad 624 01:04:25.360 --> 01:04:32.600 or burdensome for the buyers, while at the same time a price levied compulsorily on the 625 01:04:32.600 --> 01:04:39.880 same buyers for dubious governmental services for which they have not demonstrated a need, 626 01:04:39.880 --> 01:04:42.220 is somehow good. 627 01:04:42.220 --> 01:04:46.960 Why are high prices burdensome and high taxes not?