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NOTE Binary Intervention: Taxation I

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This section of Power and Market is nicely broken into two parts.

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In the first part, Rothbard gives us a kind of a general treatment of taxation.

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And then in the second part, he deals with the question that obsesses the mainstream,

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which is the incidence of taxation dealing with the – whether or not the person upon

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whom the tax is levied can shift the burden of the tax to someone else.

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So we're going to do the same thing.

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We're going to divide this up and since most of your questions that you wrote were about

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the first part of the material, let's go ahead and have some of our discussion also

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and also about the first part before we go on to incidents.

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And because of the sort of broad sense in which some of these questions address issues,

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it's helpful, I think, to just have them addressed up front.

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One of the questions was – and this is a key question, of course, for studying –

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for studying this whole week, Rothbard's text.

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What sort of contribution have the Austrians made here?

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What's the distinctiveness of the Austrians?

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Are they just sort of repeating in a better way what the mainstream is doing?

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Or is there something fundamentally unique or distinctive about it?

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So let me try to address this question by asking you a question.

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How many of you have taken a course in public finance?

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A few of you, just a few.

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How is the course laid out?

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What's the sequence of topics that you, just in general, the broad topics that you take?

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Do you dive right into taxes in a course in public finance?

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What's the first thing you talk about?

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Yeah, and what's the purpose?

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He said the social costs and benefits,

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or you talk a little bit about efficiency or some other thing like this, right?

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Why? Why do you talk about that first?

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What's next after you talk about efficiency or costs and benefits?

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What's the point? Why is the mainstream economist...

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I thought this was about public finance, right?

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What's the way you're doing this?

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Where do they go with this?

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Yes?

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It's sort of about justifying the viewer.

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Justify what?

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Taxation.

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Okay.

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And then you make the wrong diagram.

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You just want to talk until it benefits the right person.

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And what is their basic justification?

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Pick up one of these public finance books and you open it up the first few chapters

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and you read through their argument about the justification for government activity at all.

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Of course, you don't need taxes if you don't have any government activity, right?

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So first you justify government activity. How do they do it?

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How does a mainstream economist justify it?

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Yeah, it could be kind of a social wealth argument, right?

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The government can do certain things to raise our social well-being.

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And what are some of these?

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What would be a typical list that you would find?

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Or how can you say this in the negative?

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If the government can increase our social wealth, what's wrong with the market?

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Market? It's failure. Market is failing to give us these benefits that the state could give us and this justifies the state engaging in X, Y and Z and if the state, if we can show through some cost-benefit analysis that the state should do X, manage the national forests or something, then in that context we ask the question about taxation, right?

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You say, okay, the state has this job to do, now it has to be funded, the state's going to raise taxes to fund it.

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And so all the analysis of taxation is done in that context, right?

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Now, how is this different already from what you know from reading Power Market?

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How is Rothbard's approach different here?

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By the way, is it different in the sort of sequence of topics?

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Logically, I'm talking about, not as they're chronologically put in the book, but logically.

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Yes.

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I mean, in Rothbard's case, there's really a market failure system, and one exchange,

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is there a gain in interest chain or something?

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He came up with a start, and the market's right, and the market's bad.

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And why not?

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What, I mean, does he just say, in my opinion, there's no such thing as market failure,

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and so let's, you know, we can all be anarchists and here we go, let's talk about taxation.

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When I teach public finance and I use power and market, and when I teach public finance I set the

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topics out in the same way that a mainstream economist would. The students start by reading

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So we're doing the last chapter of Power and Market, the one on public policy.

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And then we do the sixth chapter, next to the last one, on anti...

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What's it called? Anti-market...

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Right, anti-market ethics.

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And of course, this is a little bit broader than what the mainstream does, right?

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But it's the same set of topics.

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In other words, first you ask the question, we've already covered how does the market work and does the market fail?

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Is there any function the government should do?

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He answered these questions, right?

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So Rothbard gives his answer to those questions.

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And then he, since he takes the position that there isn't, he has to give a critique, right?

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So he has to critique all the claims that exist that government should be doing things.

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And then he gives us the analysis of taxation.

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Now naturally, in that context, his analysis is going to be entirely different, right?

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It's entirely... the sort of questions he asks, the answers he gives, of course, are in the praxeological paradigm.

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And so we get somewhat different answers with respect to that.

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But even the sort of approach he takes to the whole thing is different, right?

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there's a there's this hard and fast discussion Professor Block talked about

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this hard and fast distinct this praxeological distinction between

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voluntary and involuntary we begin right with this and worry about we've settled

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the other questions right and so we know that the state is engaged in these

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involuntary activities and at this this then is where we begin taxation in

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and involuntary extraction of revenue.

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If you find that sort of a claim in a mainstream book, they make nothing of it.

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No important implications come from this, right?

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That taxation is involuntary or extractive, coercive.

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They may say that, but there's no analytical implication of it.

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So I would say this is the difference, right?

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We get a complete praxeological development here, even on the question of the activities

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of a state.

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What activities of a state can be justified?

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His analysis is praxeological.

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This is a big difference.

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And so when he gets to taxation, it's all within the context of this particular approach.

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Okay.

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So, given that, let's continue on and some of the other things that he says in the introduction

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and some of the questions that you posed here.

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He points out, of course, in that the state has two sources of revenue, taxation, which

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is praxeologically equivalent to robbery, it's an involuntary extraction, and counterfeiting,

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monetary inflation, as he says, the issue of fraudulent money substitutes, or in the

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case he hasn't covered yet, a fiat paper.

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Okay, so we have robbery and counterfeiting, right?

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These are the sources of revenue for the state.

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And then he asks the next question, the next question in general analysis is, what's the

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burden on society when, generally speaking, what's the burden on society when the state

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exercises these revenue raising activities?

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And he gives us a very interesting answer here, one again that I don't think you would

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find often in the mainstream.

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He says, there isn't any way to tell what the burden of taxation is without including

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Expenditures

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Do you remember the argument? Why does he say it? What's his reason here?

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You can't look at taxation alone, in other words.

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You have to look at both taxation and expenditure.

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And in fact, he says something, I believe he says something in the book, in this section like,

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for the bulk of this section, we'll consider that all tax revenues are spent by the state.

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In other words, what would happen if the government taxed us?

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You know, we sent in our money to the IRS and they didn't spend a dime of it.

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They just put it in the treasury vault. Then what would happen?

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They burned it or something, right? Tossed it into the ocean, whatever.

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But they didn't spend any of it. What would the effect be? The economic effect?

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Come on, you guys learned this already.

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Yes?

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I think that there would be a distribution effect if the process is poor.

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Exactly, there would be deflation, monetary deflation,

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and we would get the non-neutral distribution effects of the monetary deflation.

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And there might be other income distribution effects

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if the government taxes us unequally, disproportionately.

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They take all the tax money from me or something with that one.

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So my real position would fall.

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But there wouldn't be anything else, right?

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There wouldn't be an overall shifting of resources out of our hands and into the hands of the state.

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So this is why you must take the two together.

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The government isn't raising tax revenue to bury the money in the ground or to burn it or throw it away.

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They want to spend it.

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The point is to shift resources into the hands of the state for their use and away from the private sector.

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So this is the general burden of taxation.

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It's the fact that these resources now are not available to us privately,

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but have been taken by the state to use for their own purposes.

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So consumer satisfactions must, we as consumers must have our satisfactions reduced.

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Now he gets to the next step then, he says,

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he says taxes then must divide society into two major groups.

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There are taxpayers on the one hand and tax consumers on the other hand.

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And the tax consumers would include not only what you might think of as the ruling class,

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the politicians, the bureaucrats, and so on, but those who are primarily subsidized by the state,

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say armament industry or let's say if they're welfare recipients right they

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would be tax consumers and so on now one of you ask a question about this another

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good good question that we need to work out before we can go on here and this is

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Is this distinction really operational?

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And I think the question, and whoever wrote the question, was it Mary?

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You can please speak up on my answer to it.

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So your question that you posed is something like, well,

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isn't it sort of difficult to tell exactly who are in these groups?

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because the effects of what the state is doing are hard to disentangle.

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They're rearranging property ownership and so on.

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And it's sort of difficult to tell exactly whether you're on net benefiting

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or being harmed by the overall activity of the state.

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I think what Rothbard would say in response to this is that he's not really trying to ascertain the broader,

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The answer to the broader question, is a person on net benefiting from the existence of the state or not?

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He's trying to answer a narrow question which is, is the revenue, so the income earned by any particular person from the taxation or not?

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On net, in other words, is the income that they're earning from taxation?

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And that question I think can be somewhat more easily answered.

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I agree that your question that you're trying to answer is much more difficult

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and probably entirely problematic.

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In other words, if we ask the question, you know,

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how much do we benefit from the public roads or, you know,

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the public subsidies of electricity or something relative to taxes that we pay and what have you.

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So yes, go ahead.

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Yeah, I don't know if there's a place to discuss part of this idea.

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Two of the issues that were implicitly called by this question.

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One of them is, yeah, imagine a guy that...

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I will take two examples to illustrate that.

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Imagine a guy that opened a restaurant in front of the Ministry of Education.

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and all these clients are public citizens and yeah, so it's contra-factually if you have no business there,

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probably at another place, you don't know, then imagine other, this is one example,

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The other one is categories of people under regulation, as we learned in the previous chapters, like professors, formations and policemen.

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If you want B2B to be a policeman, he has to be employed by the state, it's no other issue.

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So that does not mean that you will not have that he's the direct, of course he's the direct beneficiary of the state distribution, but it doesn't mean that you will not have an opportunity on a free market, maybe at a higher price, or lower price, for formations and for lawyers, for other professions, regulated, is the same, and yeah, so the importance to answer this question, I think it's also from the perspective of

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of understanding the implication of the distribution, and probably finally, how to advocate the possibility of restitution, to know from whom we took, to know from which we gave, if hypothetically we should restitute the best benefit itself.

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To this, I think, again, is to say what I think Rothbard is aiming at in this distinction.

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What implication does he think follows from this distinction?

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And because I don't disagree with what you've brought up, I think that, you know, this is one way to look at it.

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But I think that you're, by looking at it your way, you're addressing a different question.

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What Rothbard is trying to address is, it seems to me, is the question of who makes up the ruling class, so to speak.

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How do we identify the class of rulers as opposed, you know, the ones who rule over us,

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the state apparatus itself, from those of us who are being ruled?

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And if that's your question, I think his distinction is sufficient.

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I take your distinction to mean something like, how do we, or what seems to be implied by your distinction is,

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says, how do we explain those who are sort of in favor of the state?

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How do we explain whether any particular person sort of says, I like my government, or at

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least I don't actively work against it?

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And there I think what your sort of broader sense in which you're trying to look at this

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would apply, right?

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So Rothbard really isn't trying to address that particular point here.

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How would you answer the first question?

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Would you be the answer to the first question?

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Who's the winning class?

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Well, I don't think that Rothbard's distinction fully answers that question,

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but I think his distinction relates to the answer to that question.

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In other words, he's trying just simply to say,

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who is monetarily benefiting in terms of their income,

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Income, who's in a position to influence decision-making in the state, who are the monetary beneficiaries,

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the direct monetary beneficiaries of the state, who would be in a position then to lobby the

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state to control the decision-making process in the state.

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Now there are gray areas, I would admit there are gray areas between these, like maybe your

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case of the restaurateur, but he would not be included, right, in Rothbard's category

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The theory of a tax consumer, he's just an entrepreneur who has business clientele who

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happen to work for the state.

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He's not part of the state apparatus, he's unlikely that he's lobbying the state so that

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these guys get bigger income so that he gets more of the money and so on.

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Well, he would be hired, you mean just the worker.

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But no, the entrepreneur, it's a private entrepreneur.

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Oh yeah, that he would be part of the apparatus, right?

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If he's working directly under contract of the state, he would be.

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And the distinction between the...

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Because he directly gets income from the state,

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he's in a position to be part of the decision-making process of the state.

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He's part of this apparatus of the state.

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He's part of the ruling class, then.

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But he's a private, he has a private business.

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Yeah, well, he has a quasi-private business, right?

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So you do want him to stay.

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Yeah, yeah, so, but anyway, I think that's what he's trying to get at.

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Okay, yes, go ahead.

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______________

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Yeah, well, here we have a somewhat more complicated problem, right?

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It's like the, if the state monopolizes or subsidizes an industry

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where you've specialized and your labor value exists there,

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to the point where you can't find employment elsewhere,

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then you're sort of stuck with this, right?

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I mean, it's not, I admit that there are great cases

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and there are situations where we can't quite make

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this distinction black and white that Rothbard's aiming at,

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but I think that's what he would say

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in response to that particular problem.

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Okay, well, let's go on to the next thing.

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And so, Rothbard says taxes then divide society into these two big groups, as far as this

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narrow question that he's trying to address.

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And then he says, on the expenditure side, the basic point about expenditure, of course,

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is that the expenditure redistributes income.

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So he gives a simple example of taxing the codfish industry, and then the state spends

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the money on armaments, and he just quickly rehearses what would happen to factor prices

250
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and incomes and entrepreneurial profits, right?

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This story we know fairly well, the prices of the specific factors in codfish industry

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would fall dramatically, the nonspecific would fall less, and those guys would exit

253
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and go to less high paying opportunities.

254
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The marginal producers would exit the market, supplies would be reduced, prices would rise.

255
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In armaments there would be, you know, higher income, higher prices, higher incomes, greater

256
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and their profitability to the production of specific factors, and so on.

257
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The third thing he points out in the general part is that

258
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taxing and expenditures of the state are in fact compatible with equilibrium.

259
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Once the state puts into motion a system of taxing and spending,

260
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then entrepreneurs will adjust to this, reallocations will occur,

261
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and a new equilibrium, a new final state of rest would be reached.

262
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And this could in fact then be a stable ongoing equilibrium situation.

263
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Now he wants to say this because he wants to contrast this situation with inflation.

264
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So if the state uses its second form of raising revenue, monetary inflation,

265
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especially through credit expansion, this activity that they set in motion,

266
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The economic repercussions of this do not lead to equilibrium.

267
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This activity leads to the boom bust.

268
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There is no permanent new final state of rest that can be reached

269
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if the state finances its expenditures through monetary inflation and credit expansion.

270
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So that's an important distinction between these two methods of finance.

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Then he gets to the next point in the general overview,

272
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which is again one that questions were asked about and this is that he says all

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government expenditures for resources are a consumption in other words they

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cannot be considered investment or producing capital goods they're only

275
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they're only consumption and he says this is true just as a matter of

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category, definitions, right? What is a consumer good? A consumer good is a good

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that directly satisfies the end. And when a government official decides or a group

278
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of them decide, we'll spend on this particular good, it directly satisfies

279
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their preference. Now one of you asked a question about this, you said, well what

280
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but isn't, but isn't the distinction between a capital good and a consumer

281
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consumer good also related to time. So wouldn't it be, in other words, there might be some

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future end that's being achieved by a government production. So wouldn't, couldn't that be

283
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considered a capital good? And I think the example was like a dam. So the government

284
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builds a Hoover Dam or whatever. And then wouldn't it be, wouldn't that be a capital

285
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good because it gives consumption value to politicians in the future? But I don't think

286
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that's right. I think it would just be a durable consumer good. Would it, would it not? Would

287
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would just be a durable consumer good, right?

288
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It's just continuously giving, if it does,

289
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it would continuously give direct consumption services

290
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to politicians.

291
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In other words, they're not using it

292
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to produce something else.

293
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It's not integrated into the capital structure.

294
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It's just a direct consumption good for them.

295
00:24:35.360 --> 00:24:37.860
Now, there's another question that Rothbard doesn't address,

296
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which I think we might usefully explore.

297
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Maybe it's true, maybe he's right about that.

298
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Let's set that question aside as to the nature, the consumptive nature of the good from the viewpoint of government officials.

299
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Could we say that the dam or the road or whatever it is that the state produces is a capital good for the economy, for entrepreneurs in the economy?

300
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Is the dam a capital good in this respect?

301
00:25:08.540 --> 00:25:15.940
or the road or again whatever infrastructure or whatever durable goods are produced by the state.

302
00:25:15.940 --> 00:25:20.940
And I think here the answer that Rothbard would give, I'm not sure he addresses this question in the text,

303
00:25:20.940 --> 00:25:24.140
but I think the answer he would give here is no, it's not.

304
00:25:24.140 --> 00:25:26.340
It's not a capital good.

305
00:25:26.340 --> 00:25:32.040
And the reason that I would say this or a couple of reasons actually I would say this.

306
00:25:32.040 --> 00:25:37.340
First of all, one way to look at this would be in the following.

307
00:25:37.340 --> 00:25:46.100
The good that's produced, the dam, the road, whatever it might be, isn't integrated into

308
00:25:46.100 --> 00:25:52.700
the entrepreneur's assessment of economic calculation of the different stages of production

309
00:25:52.700 --> 00:26:01.760
and capital goods, right? The road is a free good. Now, how should an entrepreneur treat

310
00:26:01.760 --> 00:26:08.560
a free good. It's free to him. Free to him with respect to his business calculation.

311
00:26:08.560 --> 00:26:17.440
It's free. Well, he treats it just like it were an existing, a pre-existing fact of nature.

312
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Like it were a grove of trees or a, right, something that just exists in nature. That's

313
00:26:22.620 --> 00:26:30.020
not a capital good. That isn't definitionally a capital good. And let me give you an example

314
00:26:30.020 --> 00:26:36.020
If this sounds maybe not quite right to you, let me give you an example to illustrate this.

315
00:26:36.020 --> 00:26:42.020
Mark Thornton mentioned in his discussion the railroads.

316
00:26:42.020 --> 00:26:45.020
Okay, so we know the story of the railroads, right?

317
00:26:45.020 --> 00:26:53.020
We have these huge subsidies, land grants and loan guarantees and so on to the railroad companies

318
00:26:53.020 --> 00:26:59.020
that fostered all this building of the transcontinentals and we agree, right,

319
00:26:59.020 --> 00:27:02.940
Right? This is all malinvestment, or a large portion of this is malinvestment. In fact,

320
00:27:02.940 --> 00:27:07.980
later on, many of these railroads do in fact go bankrupt. But what do we say about the,

321
00:27:07.980 --> 00:27:14.380
what then do we say about the entrepreneurs who built their businesses along the railroad?

322
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What about them? Isn't this inefficient too? Wasn't there an overbuild-up, right? A malinvestment,

323
00:27:22.740 --> 00:27:27.580
too much capital was being directed here because they were getting essentially a free, well,

324
00:27:27.580 --> 00:27:35.580
not a free, but a subsidized good. This isn't fully, right? This creates some malinvestment.

325
00:27:35.580 --> 00:27:38.580
So it seems to me the same thing would be true about a road. You put in a road, right?

326
00:27:38.580 --> 00:27:42.580
The government puts in a nice new road. Entrepreneurs, it's a free good to them.

327
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They come and they build along the road. They buy their, right?

328
00:27:45.580 --> 00:27:54.580
They get their businesses set up along the road. And this, well, this is malinvestment then.

329
00:27:54.580 --> 00:27:58.580
This is a distortion in the same way.

330
00:28:00.580 --> 00:28:04.580
So those are the reasons that I would suggest.

331
00:28:04.580 --> 00:28:11.580
Again, the good that the state produces is not produced under economic calculation.

332
00:28:11.580 --> 00:28:16.580
And therefore, even if we treat it, even if we say somehow categorically it's a capital good,

333
00:28:16.580 --> 00:28:19.580
there would be a distortion involved.

334
00:28:19.580 --> 00:28:32.580
Okay. So, let's see. The next thing that Rothbard gets is the last couple of things here.

335
00:28:32.580 --> 00:28:38.580
He says, okay, so in general, then, there's a two-fold effect of taxation.

336
00:28:38.580 --> 00:28:47.580
The first is that it distorts the allocation of resources, consumers under some taxing scheme.

337
00:28:47.580 --> 00:28:50.580
Then have the preferences satisfied as less fully as possible.

338
00:28:50.580 --> 00:28:54.580
This is his idea that no tax is neutral to the market.

339
00:28:54.580 --> 00:29:01.580
Every tax affects, just like every monetary inflation,

340
00:29:01.580 --> 00:29:07.580
affects the pattern of prices, income distribution, production patterns in the economy.

341
00:29:07.580 --> 00:29:11.580
He says there are only three things that are neutral to the market.

342
00:29:11.580 --> 00:29:16.580
These are voluntary purchases that lead to prices and so on.

343
00:29:16.580 --> 00:29:21.860
Second would be voluntary contributions, gifts, voluntary transfers.

344
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These are neutral to the market.

345
00:29:24.180 --> 00:29:28.700
And the third would be restitution payments that are made by criminals.

346
00:29:28.700 --> 00:29:30.340
These are neutral.

347
00:29:30.340 --> 00:29:32.300
And aside from this, nothing else is neutral.

348
00:29:32.300 --> 00:29:36.180
Everything else distorts the allocation of resources.

349
00:29:36.180 --> 00:29:41.220
Now one of you asked a question about the relationship between Mises' views and Rothbard's

350
00:29:41.220 --> 00:29:44.540
views on the question of tax neutrality.

351
00:29:44.540 --> 00:29:53.340
So let me try to address this, most of you know Mises is a, well, a minarchist, right?

352
00:29:53.340 --> 00:30:00.100
He's a minimal government advocate, so he advocates the minimal state necessary just

353
00:30:00.100 --> 00:30:08.420
to defend person and property from criminal aggression and nothing else.

354
00:30:08.420 --> 00:30:13.220
And so this does raise the question of, well, you have to have taxes, so Mises was in favor

355
00:30:13.220 --> 00:30:17.820
for the Necessary Taxes to Do This.

356
00:30:17.820 --> 00:30:24.460
Did he think that the taxes that would be raised for the state in the minimal condition

357
00:30:24.460 --> 00:30:27.580
could be raised in a neutral fashion?

358
00:30:27.580 --> 00:30:32.340
Did he think that raising the amount of money would be, could in fact be neutral to the

359
00:30:32.340 --> 00:30:33.340
market?

360
00:30:33.340 --> 00:30:38.220
Now, to the best of my knowledge, you can help me out as to the faculty if I just am

361
00:30:38.220 --> 00:30:41.780
ignorant of this, he didn't write on this particular question.

362
00:30:41.780 --> 00:30:47.180
I don't think he ever, at least in human action, I'm pretty sure he didn't say anything about this,

363
00:30:47.180 --> 00:30:49.580
whether or not they would distort the market.

364
00:30:51.580 --> 00:30:55.580
I take his position by inference to be that they would distort the market.

365
00:30:56.980 --> 00:31:01.380
In his section on taxation, he certainly doesn't give any indication

366
00:31:01.380 --> 00:31:03.380
that there's something like a neutral tax.

367
00:31:04.380 --> 00:31:08.980
And of course, Mises was interested in other lines of argument from Rothbard.

368
00:31:08.980 --> 00:31:11.380
He wasn't really interested in this question of neutral taxation,

369
00:31:11.380 --> 00:31:22.020
but in his other theories of taxation like the sort of snowballing effect of intervention and so on.

370
00:31:22.020 --> 00:31:30.300
But I think that Mises would say whatever distorting effect that the taxes create

371
00:31:30.300 --> 00:31:34.460
that are necessary to fund the minimal state, you just have to bear them.

372
00:31:34.460 --> 00:31:38.060
You have to bear them because they're the price you pay, part of the price you pay

373
00:31:38.060 --> 00:31:42.460
to have the defense services of the state.

374
00:31:42.460 --> 00:31:47.860
So I don't know of any, you know, drawn out debate between the two positions.

375
00:31:47.860 --> 00:31:53.260
He does limit for mutual, but does distinguish between confiscatory taxation,

376
00:31:53.260 --> 00:32:00.260
which does, between principal on his destructive health and market,

377
00:32:00.260 --> 00:32:02.860
and then taxation that's sort of fun.

378
00:32:02.860 --> 00:32:05.360
Yeah, right, right. You're absolutely right.

379
00:32:05.360 --> 00:32:09.300
He doesn't say about that.

380
00:32:09.300 --> 00:32:18.240
And I'm pretty sure his position would be that if he thought that the taxes necessary to fund the minimal state did disrupt the market,

381
00:32:18.240 --> 00:32:25.080
well, so be it, right, because you had to have the state performing these functions.

382
00:32:25.080 --> 00:32:34.880
So on that point, I don't think they really had any give and take or there was much discussion between them on that.

383
00:32:34.880 --> 00:32:37.480
Okay, so that's the first effect of taxation, right?

384
00:32:37.480 --> 00:32:40.080
It distorts the allocation of resources.

385
00:32:40.080 --> 00:32:47.180
And then the second is that it severs income distribution, so to speak, from production.

386
00:32:47.180 --> 00:32:53.280
So Rothbard makes the point, again, this is directly from his praxeological view,

387
00:32:53.280 --> 00:32:55.680
that there is no income distribution in the market.

388
00:32:55.680 --> 00:32:57.980
There's just the production and earning of income.

389
00:32:57.980 --> 00:33:00.880
There's no separate distribution process.

390
00:33:00.880 --> 00:33:04.280
People simply produce income and then they earn it.

391
00:33:04.280 --> 00:33:09.280
And what the state does through taxing and spending, of course, is sever this link.

392
00:33:09.280 --> 00:33:13.680
So the state actually creates the problem of income distribution,

393
00:33:13.680 --> 00:33:20.180
since there is no income distribution, per se, on the market.

394
00:33:20.180 --> 00:33:24.280
Then finally, the last point that he makes, again, that you won't find in,

395
00:33:24.280 --> 00:33:28.880
I don't think in the standard treatment, is he says,

396
00:33:28.880 --> 00:33:32.280
he says the extent, or you won't find any emphasis on this in standard treatment.

397
00:33:32.280 --> 00:33:38.280
He says, the extent of the distortion that's created by taxation and expenditure of the state

398
00:33:38.280 --> 00:33:44.280
depends primarily upon the level of taxation and expenditure

399
00:33:44.280 --> 00:33:48.280
and not upon the form of taxation and expenditure.

400
00:33:48.280 --> 00:33:50.780
So that's just a secondary question.

401
00:33:50.780 --> 00:33:58.280
The big question is, does the state take 50% of our income or does it take 20% or does it take 5%?

402
00:33:58.280 --> 00:34:07.480
not does the state have excise taxes or does it have tariffs or does it raise its taxes through income taxes and so on.

403
00:34:07.480 --> 00:34:11.980
Now, it's not to say that those questions are totally unrelated.

404
00:34:11.980 --> 00:34:19.280
It's just that Rothbard's emphasis then is on, of course, reducing this distortion.

405
00:34:19.280 --> 00:34:25.980
You want to reduce the distortion, it's better to reduce overall taxes than it is to say shift from the,

406
00:34:25.980 --> 00:34:31.780
I don't know, income tax to a value-added tax or something of the sort.

407
00:34:31.780 --> 00:34:38.180
Now, let me get to one last question that was asked in this introductory part.

408
00:34:38.180 --> 00:34:42.080
And I think this was asked by Jonas.

409
00:34:42.080 --> 00:34:46.980
I'll ask him to comment on this because I don't, because it wasn't elaborated on.

410
00:34:46.980 --> 00:34:49.780
But I think the question went something like this.

411
00:34:49.780 --> 00:34:53.880
Okay, I don't really, I can't go along with Rothbard really here on this,

412
00:34:53.880 --> 00:35:15.880
I think Rothbard has an incorrect or stunted notion of human nature, but there was no elaboration, so maybe you can say exactly what you have in mind here.

413
00:35:15.880 --> 00:35:38.880
I think it goes back again to my question on the time scale space, because I think that if you decide that there is no comparison, then by definition, all taxation, all redistribution is but admission that it can increase you to it.

414
00:35:38.880 --> 00:35:46.880
However, if you do not take that standpoint, you have to approach it from a different angle.

415
00:35:46.880 --> 00:35:55.880
And sort of from there, I find that these discussions on taxation, et cetera, doesn't conform with my view,

416
00:35:55.880 --> 00:36:05.880
because I still am not convinced, or I can't see the logic of not comparing it with some values.

417
00:36:05.880 --> 00:36:17.960
So from there, I mean, these conclusions follow a lot, it's just that, to me, they don't feel relevant because I have another view on this issue, to a certain extent.

418
00:36:17.960 --> 00:36:33.200
Okay, but would you say, though, that the analysis that he does after this introductory section where he goes through the incidents of taxation and kind of lays out the economic implications of each of these different types of taxes,

419
00:36:33.200 --> 00:36:37.200
You wouldn't then say that all of that is incorrect, right?

420
00:36:37.200 --> 00:36:40.200
No, definitely not.

421
00:36:40.200 --> 00:36:48.200
I think it relies on the basic notion that all forms of redistribution are for definition

422
00:36:48.200 --> 00:36:52.200
and mislocation of resources.

423
00:36:52.200 --> 00:37:01.200
And I think from that point of view, it stems from this conviction that we cannot compare

424
00:37:01.200 --> 00:37:06.200
and I agree with some of the other people.

425
00:37:06.200 --> 00:37:11.200
So I really didn't want to be a harper for this.

426
00:37:11.200 --> 00:37:16.200
I was just justifications for why I didn't submit any questions.

427
00:37:16.200 --> 00:37:21.200
But it would be great if I could be convinced of the argument.

428
00:37:21.200 --> 00:37:49.200
But it would be great if I could, well, if I could be convinced of the argument that has far, it has been sort of, not avoided, but, and to me it's a crucial part of it, because, I mean, this is where it becomes political, because I think this is the, you know, the crucial point we have to think about.

429
00:37:49.200 --> 00:38:01.880
Right, okay, let me take one stab at that. The way that I think about the relationship

430
00:38:01.880 --> 00:38:09.600
between those two elements, the utilities analysis and the sort of economic effects

431
00:38:09.600 --> 00:38:15.580
that we trace out through the economy, that I don't think, the way I see it, the distinction

432
00:38:15.580 --> 00:38:23.100
The distinction that Rothbard makes is that in the market, all these changes are voluntary.

433
00:38:23.100 --> 00:38:25.580
And with the state, they're involuntary.

434
00:38:25.580 --> 00:38:28.020
And so that distinction is sufficient.

435
00:38:28.020 --> 00:38:34.160
It isn't that we, it isn't that any interpersonal comparisons need to be made in order to get

436
00:38:34.160 --> 00:38:36.000
to the latter part of the analysis.

437
00:38:36.000 --> 00:38:39.000
We just have to have that distinction.

438
00:38:39.000 --> 00:38:43.000
I know, and I think that is a very valid distinction to this point.

439
00:38:43.000 --> 00:38:53.000
On the other hand, I think it's just that I think it's a question of what we want to maximize.

440
00:38:53.000 --> 00:38:55.000
What is it that we strive for?

441
00:38:55.000 --> 00:38:58.000
And I think I am more bound to have a more...

442
00:38:58.000 --> 00:39:00.000
I'm coming from Sweden.

443
00:39:00.000 --> 00:39:02.000
I think I tend to more...

444
00:39:02.000 --> 00:39:10.500
I'm trying more to think in terms of society, for me it's an actual term, and I think maybe increase utility for me.

445
00:39:10.500 --> 00:39:16.000
And I mean, from that point of view, where there are voluntary transactions, I definitely agree.

446
00:39:16.000 --> 00:39:21.000
It's just that I think that the involuntary actions can upset people.

447
00:39:21.000 --> 00:39:24.000
I think it's a...

448
00:39:24.000 --> 00:39:51.000
Okay, well maybe something we say will trigger further thoughts on that. Okay, so anything else you want to take up at this point in this introductory section?

449
00:39:54.000 --> 00:40:04.800
All right, let's go to the second half of this, then, and talk about incidence theory.

450
00:40:04.800 --> 00:40:11.200
And here, too, we find that Rothbard's treatment is somewhat different than the mainstream.

451
00:40:11.200 --> 00:40:17.720
So he begins this discussion just by introducing the idea of incidence and says, okay, the

452
00:40:17.720 --> 00:40:23.320
question at hand is whether a tax can be shifted if a tax is placed upon, let's say, a seller

453
00:40:23.320 --> 00:40:31.360
More of a Good on an Entrepreneur, you tax Apple computers.

454
00:40:31.360 --> 00:40:39.440
Can this tax just be sent along by raising, let's say, selling prices, sent along to

455
00:40:39.440 --> 00:40:40.440
the consumer?

456
00:40:40.440 --> 00:40:47.040
Can it be passed on to the consumer or can it be passed backward by lowering factor prices?

457
00:40:47.040 --> 00:40:52.020
So this is a question of incidence or does the tax have to be borne by the person upon

458
00:40:52.020 --> 00:40:55.660
On Whom the Tax is Levied, this is the question.

459
00:40:55.660 --> 00:41:01.820
And he says the basic law of incidence is that no tax can be shifted forward.

460
00:41:01.820 --> 00:41:06.660
In no circumstances can any tax be shifted forward.

461
00:41:06.660 --> 00:41:14.220
Now his argument is straightforward here, although again it depends upon the absorption

462
00:41:14.220 --> 00:41:17.420
of his economic theory.

463
00:41:17.420 --> 00:41:25.460
And the argument is this, that the prices that exist in markets for goods that the consumers

464
00:41:25.460 --> 00:41:28.940
are paying are set by the consumer's demands.

465
00:41:28.940 --> 00:41:33.180
And the seller has already set the price at the point where he thinks he's getting the

466
00:41:33.180 --> 00:41:34.180
greatest revenue.

467
00:41:34.180 --> 00:41:37.980
He's already set it at the point where he thinks he's, you know, his monetary situation

468
00:41:37.980 --> 00:41:40.100
is as good as it can be.

469
00:41:40.100 --> 00:41:46.100
So when the tax is levied on him, it would simply hurt him even more if he tries to raise

470
00:41:46.100 --> 00:41:47.100
his price.

471
00:41:47.100 --> 00:41:50.240
This is his price, then his revenues will fall.

472
00:41:50.240 --> 00:41:53.640
This is the position that he's in, right?

473
00:41:53.640 --> 00:41:56.400
The tax on the seller does nothing to change the demand

474
00:41:56.400 --> 00:41:58.600
that the buyer has for the good.

475
00:41:58.600 --> 00:41:59.760
The demand the buyer has for the good

476
00:41:59.760 --> 00:42:03.400
is based upon the marginal utility he places on the good.

477
00:42:03.400 --> 00:42:07.200
He doesn't even know what taxes the seller is paying.

478
00:42:07.200 --> 00:42:09.440
He doesn't know what his production costs are.

479
00:42:09.440 --> 00:42:11.700
He doesn't care about any of this.

480
00:42:11.700 --> 00:42:14.000
And so no tax could ever be passed forward

481
00:42:14.000 --> 00:42:19.800
because these prices depend upon the buyer's demands.

482
00:42:19.800 --> 00:42:29.300
And the buyer's demands cannot be influenced by the seller's costs or taxes or other aspects.

483
00:42:29.300 --> 00:42:32.100
Okay, that's the basic law of the incidence.

484
00:42:32.100 --> 00:42:38.300
Then he says, then he gets to topology of taxes and he says there are two types of taxes.

485
00:42:38.300 --> 00:42:49.100
They're, first of all, taxes on income, these taxes that we pay out of our earnings from production.

486
00:42:49.100 --> 00:42:58.400
And these he subdivides into the general categories are a general income tax and a partial income tax.

487
00:42:58.400 --> 00:43:03.600
So a general income tax would be an income tax at the same rate on all sources of income.

488
00:43:03.600 --> 00:43:09.440
A partial income tax obviously then on just some forms of income,

489
00:43:09.440 --> 00:43:14.720
like a tax on just wages or a tax just on corporate profits.

490
00:43:14.720 --> 00:43:17.920
And then the third category is a general sales tax,

491
00:43:17.920 --> 00:43:22.200
a tax at the same rate on all sales of everything,

492
00:43:22.200 --> 00:43:26.120
and then a partial sales tax.

493
00:43:26.120 --> 00:43:27.520
So those are the income taxes.

494
00:43:27.520 --> 00:43:31.240
And then he says the second broad type of taxes

495
00:43:31.240 --> 00:43:34.440
are taxes on accumulated capital.

496
00:43:34.440 --> 00:43:40.640
This is a wealth tax, a tax on the accumulation of wealth

497
00:43:40.640 --> 00:43:43.440
that people have engaged in in the past.

498
00:43:43.440 --> 00:43:46.040
And here he gives us the following types.

499
00:43:46.040 --> 00:43:51.040
He says they're tax on gifts or bequests.

500
00:43:51.040 --> 00:43:56.040
They're taxes on property, on the value of your,

501
00:43:56.040 --> 00:43:59.440
the capital value of your property, the accumulated value of your property

502
00:43:59.440 --> 00:44:03.440
and taxes on personal wealth. So these are the three categories.

503
00:44:03.440 --> 00:44:07.340
So now let's work through each of these briefly

504
00:44:07.340 --> 00:44:11.240
and see if this stimulates some additional questions.

505
00:44:11.240 --> 00:44:15.140
And again, when we open up for the final round of questions,

506
00:44:15.140 --> 00:44:20.140
we can come back to the material at the beginning if you'd like.

507
00:44:20.140 --> 00:44:21.940
Okay, so let's start with the general sales tax.

508
00:44:21.940 --> 00:44:25.740
We'll just take these in the same order that he offers them.

509
00:44:25.740 --> 00:44:30.980
The general sales tax, I'd say it's a 20% tax that is on all sale,

510
00:44:30.980 --> 00:44:35.580
so all sellers are, the tax is levied upon them, no matter what they're selling,

511
00:44:35.580 --> 00:44:40.780
as a 20% tax on the value of what they sell.

512
00:44:40.780 --> 00:44:45.260
As Rothbard points out, this can't be shifted forward.

513
00:44:45.260 --> 00:44:50.180
Buyers' demands are already set, whatever they happen to be,

514
00:44:50.180 --> 00:44:54.020
and the sellers have already set their prices with respect to those demands

515
00:44:54.020 --> 00:45:00.700
at the best possible point and so it would only be harmful to raise them so

516
00:45:00.700 --> 00:45:05.900
what the tax what the general sales tax does of course is lower the net income

517
00:45:05.900 --> 00:45:11.260
of the or net revenues of the entrepreneur it lowers his proceeds

518
00:45:11.260 --> 00:45:17.220
right is a monetary sum of money that he has to demand the factors of production

519
00:45:17.220 --> 00:45:22.180
for all entrepreneurs throughout the whole economy and so naturally if they

520
00:45:22.180 --> 00:45:27.180
If they have less money to bid for the factors of production, all the factor prices must fall.

521
00:45:27.180 --> 00:45:32.180
So a general sales tax, as he points out, is just an income tax.

522
00:45:32.180 --> 00:45:37.180
It's a tax that's shifted backwards onto producers and it lowers their incomes.

523
00:45:37.180 --> 00:45:46.180
It isn't really a tax on consumption itself.

524
00:45:46.180 --> 00:45:51.180
It's imputed back and becomes an income tax.

525
00:45:51.180 --> 00:45:59.180
So this is the first step, in the second step he says, again, to have a full analysis, we have to include the expenditures.

526
00:45:59.180 --> 00:46:01.680
What would happen then with the expenditures?

527
00:46:01.680 --> 00:46:11.680
Okay, he's explained this in the general section before, but the expenditures of the state then would add an income redistribution

528
00:46:11.680 --> 00:46:13.680
and a change in the pattern of production.

529
00:46:13.680 --> 00:46:17.680
So the state spends on armaments, so entrepreneurs would respond to this,

530
00:46:17.680 --> 00:46:23.200
and building up, because it's more profitable now to produce, they would have more income,

531
00:46:23.200 --> 00:46:27.880
bidding factors away from other processes, and wages of those workers would rise, and

532
00:46:27.880 --> 00:46:33.320
specific factor prices would rise, they're necessary to produce here, more entrepreneurs

533
00:46:33.320 --> 00:46:37.640
would move into this field and out of others, right, so we get this pattern of change of

534
00:46:37.640 --> 00:46:45.680
the resource allocation and incomes along this lines of spending of the state.

535
00:46:45.680 --> 00:46:52.080
And then he addresses this last, the last question he addresses is just on the general sales tax.

536
00:46:52.080 --> 00:46:58.680
The general sales tax, he says, does not favor saving and investing.

537
00:46:58.680 --> 00:47:07.080
It isn't that you tax consumption, right, and so people shift away from consumption towards saving and investing.

538
00:47:07.080 --> 00:47:15.480
Why not? Well, as we said before, what happens to the general sales tax is not that prices don't rise, right?

539
00:47:15.480 --> 00:47:24.840
So, demands don't change in that respect. Incomes are reduced and when incomes are reduced,

540
00:47:24.840 --> 00:47:28.840
if time preferences don't change, you'll get to that question later but at this point

541
00:47:28.840 --> 00:47:33.200
he's just assuming time preferences don't change, then with their lower incomes people

542
00:47:33.200 --> 00:47:39.700
will in fact distribute their incomes to consumption and saving in the same proportion and so saving

543
00:47:39.700 --> 00:47:47.140
Everything isn't favored by this and he gives us this example just to illustrate a useful

544
00:47:47.140 --> 00:47:58.520
algebraic example where we have the net income people, is their gross income minus the tax

545
00:47:58.520 --> 00:48:02.340
and their consumption is 90% of their net income.

546
00:48:02.340 --> 00:48:07.260
So we have fixed time preferences, right, 10% is being saved, 90% consumed.

547
00:48:07.260 --> 00:48:12.940
And we have two cases, an income tax, which is 20% of gross income, and a tax on consumption,

548
00:48:12.940 --> 00:48:16.340
which is 20% of consumption.

549
00:48:16.340 --> 00:48:21.500
And so he gives us a numeric example to work through, a gross income is 100.

550
00:48:21.500 --> 00:48:24.940
With the income tax, we get this sequence, right?

551
00:48:24.940 --> 00:48:26.820
We just work out the simple algebra here.

552
00:48:26.820 --> 00:48:30.800
So net income with the tax becomes 80% of gross income.

553
00:48:30.800 --> 00:48:33.820
So with gross income at 100, net income is 80.

554
00:48:33.820 --> 00:48:39.520
90% of that gives us consumption, that's 72, 8% is saved, right?

555
00:48:39.520 --> 00:48:44.520
And then here in the second column is the tax on consumption.

556
00:48:44.520 --> 00:48:48.320
So we have net income equal to gross income minus the consumption tax.

557
00:48:48.320 --> 00:48:51.320
We plug in, do the algebra, right?

558
00:48:51.320 --> 00:48:55.420
Substitute for consumption what we know it's equal to with respect to net income.

559
00:48:55.420 --> 00:48:57.120
Solve the equation.

560
00:48:57.120 --> 00:49:01.620
And we find that net income is gross over 1.18.

561
00:49:01.620 --> 00:49:07.160
So then we solve this when gross income is 100, we see that net income is 85,

562
00:49:07.160 --> 00:49:13.920
and then 90% of that, roughly 76, and 10% 9.

563
00:49:13.920 --> 00:49:19.060
So the whole, so all of us, in the face of a general sales tax,

564
00:49:19.060 --> 00:49:23.520
all of us work out the, you know, best arrangement,

565
00:49:23.520 --> 00:49:27.720
the best new arrangement of when our income is being reduced,

566
00:49:27.720 --> 00:49:31.020
also considering our time preference.

567
00:49:31.020 --> 00:49:37.760
And our time preference, if it doesn't change, would still dictate the same proportion between saving and consumption.

568
00:49:37.760 --> 00:49:44.020
And so, saving is not proportionately aided by a consumption tax.

569
00:49:44.020 --> 00:49:51.020
Or as he puts it somewhere else in the chapter, he says, there's no such thing as a consumption tax.

570
00:49:51.020 --> 00:49:57.680
If you try to tax, a general consumption tax, if you try to tax consumption, it's just an income tax.

571
00:49:57.680 --> 00:50:01.380
Okay, now what about a partial sales tax?

572
00:50:01.380 --> 00:50:05.080
Here, Rothbard points out there would be additional effects, right?

573
00:50:05.080 --> 00:50:09.780
Because what would happen in the case of just taxing one particular line of good,

574
00:50:09.780 --> 00:50:15.280
you just tax Apple products, iPods, iPhones and so on,

575
00:50:15.280 --> 00:50:17.680
you would get shifting effects.

576
00:50:17.680 --> 00:50:26.180
Now you can, producers and so on would begin to shift away from these tax goods into untaxed.

577
00:50:26.180 --> 00:50:33.380
So, let's say if Steve Jobs tried to lower the incomes of his workers in the face of the tax, right?

578
00:50:33.380 --> 00:50:38.480
He can't, again, pass it on to his consumers, but he tries to lower his wage payments,

579
00:50:38.480 --> 00:50:41.980
then his nonspecific factors will leave,

580
00:50:41.980 --> 00:50:46.680
because they can get the market wage in the untaxed sector of the economy.

581
00:50:46.680 --> 00:50:51.880
So they'll just, they'll bolt, at least on the margin they'll leave, right?

582
00:50:51.880 --> 00:50:58.080
And so we would get this effect, this shifting out effect, right?

583
00:50:58.080 --> 00:51:05.020
And the specific factors, the full burden of the reduction of income would fall upon the specific factors.

584
00:51:05.020 --> 00:51:11.380
The specific capital that's been invested, the name brand of Apple, whatever capital assets they possess,

585
00:51:11.380 --> 00:51:16.020
the income value, the capital value of those things would then decline.

586
00:51:16.020 --> 00:51:21.640
This means it would be less invested in these areas since the capital value of these particular assets are less.

587
00:51:21.640 --> 00:51:25.720
capital investment would move to other lines of production

588
00:51:25.720 --> 00:51:29.360
and we get a further distortion, a big, you know,

589
00:51:29.360 --> 00:51:36.120
an additional economic effect that would not occur under the general sales tax.

590
00:51:36.120 --> 00:51:42.720
Okay, now let's move to the general income tax.

591
00:51:42.720 --> 00:51:46.400
And so here, Rothbard goes through the additional, you know,

592
00:51:46.400 --> 00:51:54.240
The effects are unique to a general income tax that he didn't address in talking about the general sales tax.

593
00:51:54.240 --> 00:52:04.500
So remember, a general income tax would be on all sources of income, wages, ground rents, interest, profit.

594
00:52:04.500 --> 00:52:06.740
Again, this can't be shifted forward or backward.

595
00:52:06.740 --> 00:52:11.300
The producer would have to bear the reduction of income.

596
00:52:11.300 --> 00:52:16.940
So when this happens then, of course, standards of living of the producers declines.

597
00:52:16.940 --> 00:52:22.080
They would adjust to this in the following fashions, potentially at least.

598
00:52:22.080 --> 00:52:25.900
They might decrease work and increase their leisure in the face of this, right, at the

599
00:52:25.900 --> 00:52:26.900
margins.

600
00:52:26.900 --> 00:52:28.700
Some people would be doing this.

601
00:52:28.700 --> 00:52:33.460
Here we would get a further than a depressing effect on people's standards of living and

602
00:52:33.460 --> 00:52:34.460
production.

603
00:52:34.460 --> 00:52:43.460
It says, secondly, they might substitute work in kind for work to earn money, to earn income.

604
00:52:43.460 --> 00:52:45.960
They might start doing things themselves.

605
00:52:45.960 --> 00:52:47.660
They work on their own automobiles.

606
00:52:47.660 --> 00:52:49.160
They clean their own houses.

607
00:52:49.160 --> 00:52:54.960
They do their own gardening or lawn maintenance and so on.

608
00:52:54.960 --> 00:52:57.960
As he points out, this then disrupts the division of labor.

609
00:52:57.960 --> 00:53:03.660
This makes us less well-off since the division of labor becomes eliminated by our taking on these tasks.

610
00:53:03.660 --> 00:53:08.220
We're not fully taking advantage of the division of labor as we were before.

611
00:53:08.220 --> 00:53:12.100
And so standards of living again decline because of this.

612
00:53:12.100 --> 00:53:18.740
And then additionally he says, when the general income tax reduces our incomes

613
00:53:18.740 --> 00:53:24.740
and our monetary assets in the present, our time preferences would rise.

614
00:53:24.740 --> 00:53:26.860
Our time preference rates would go up.

615
00:53:26.860 --> 00:53:31.020
When our time preference rates go up, we would save and invest less.

616
00:53:31.020 --> 00:53:34.120
Less would be put into the capital accumulation process

617
00:53:34.120 --> 00:53:36.620
and the whole capital structure would, in the future,

618
00:53:36.620 --> 00:53:43.220
would be less productive and innovative and so on.

619
00:53:43.220 --> 00:53:45.720
Now he points out that this increase in time preference

620
00:53:45.720 --> 00:53:49.920
would not be offset when the income is transferred

621
00:53:49.920 --> 00:53:52.620
to government officials who then spend it since,

622
00:53:52.620 --> 00:53:58.020
of course, in his view, their expenditures are all consumption.

623
00:53:58.020 --> 00:54:00.220
If the income is transferred to other groups,

624
00:54:00.220 --> 00:54:07.220
From one group to another, okay, so you're not, you wouldn't be completely sure of the overall net effect on time preference.

625
00:54:07.220 --> 00:54:14.620
But again, as long as government officials are taking a take out of this, they're taking their cut, right, out of the transfer funds,

626
00:54:14.620 --> 00:54:22.020
then his position would be, since their expenditures are all consumption, this would lower overall time preferences,

627
00:54:22.020 --> 00:54:27.420
lower the amount of saving and investing and have this effect on the capital structure.

628
00:54:27.420 --> 00:54:31.900
Okay, then partial income taxes, he runs through the following list.

629
00:54:31.900 --> 00:54:36.060
He says, first, there could be taxes on wages.

630
00:54:36.060 --> 00:54:41.460
Tax on wages cannot be shifted, the worker has to bear them.

631
00:54:41.460 --> 00:54:47.980
This is true of all levies on labor, right?

632
00:54:47.980 --> 00:54:53.580
Something that isn't well understood by the general public,

633
00:54:53.580 --> 00:54:58.420
that, you know, their social security taxes aren't really half paid by their employer.

634
00:54:58.420 --> 00:55:03.580
They're fully paid by the worker. It doesn't matter whether the employer is nominally sending

635
00:55:03.580 --> 00:55:09.700
the money in. Their overall compensation is lowered by that amount. Same of mandatory

636
00:55:09.700 --> 00:55:13.420
health benefits, right? They're not getting any benefit from this. They're just trading

637
00:55:13.420 --> 00:55:19.260
off monetary income for the payment for health care. So if your employer is paying all of

638
00:55:19.260 --> 00:55:25.660
of Your Healthcare Expenses, he's lowered your wage income commensurately.

639
00:55:25.660 --> 00:55:31.260
Otherwise, there would, again, be a discharge of workers from this activity.

640
00:55:31.260 --> 00:55:33.100
The corporate income tax can't be shifted.

641
00:55:33.100 --> 00:55:39.260
It has to be borne by the corporation, by the owners of the corporation.

642
00:55:39.260 --> 00:55:45.420
This tax, as Rothbard points out, penalizes the corporate form, and therefore, since it

643
00:55:45.420 --> 00:55:50.120
lowers the, you know, return to investment in the corporate form.

644
00:55:50.120 --> 00:55:57.220
Investment then would shift out into less efficient, at the margin, less efficient business forms.

645
00:55:57.220 --> 00:56:02.120
And the overall rate of return throughout the economy would then fall, right?

646
00:56:02.120 --> 00:56:11.720
And so the effect of this is to generally suppress the rate of return and to then therefore reduce saving and investing overall.

647
00:56:11.720 --> 00:56:17.520
He points out that corporate income tax, as it's typically levied, is a double taxation.

648
00:56:17.520 --> 00:56:24.720
First, the corporation's profits are taxed, and then when the remaining amount is distributed to the shareholders,

649
00:56:24.720 --> 00:56:29.120
that would then be taxed again as income.

650
00:56:29.120 --> 00:56:39.320
The only way he points out to eliminate this is to treat corporate income as pro-rata net income to the shareholders.

651
00:56:39.320 --> 00:56:47.320
Under those conditions, you'd have to eliminate the corporate income tax that way, but then you would just tax regular income.

652
00:56:47.320 --> 00:56:58.320
As he points out, this double taxation then favors retained earnings, and it leads to an inefficient amount of reinvestment in firms, in corporations.

653
00:56:58.320 --> 00:57:07.320
The excess profit tax, he points out, interferes with the most important reallocation process of entrepreneurs.

654
00:57:07.320 --> 00:57:15.120
Entrepreneurs earning more profit the more urgent the reallocation to satisfy consumer preferences is

655
00:57:15.120 --> 00:57:22.720
and therefore this is particularly harmful to the whole process of readjusting, reallocating factors of production.

656
00:57:22.720 --> 00:57:28.120
The capital gains tax as he points out capital gains are in fact income

657
00:57:28.120 --> 00:57:34.320
and so they could be treated this could be treated also as an income tax so it's a public company

658
00:57:34.320 --> 00:57:41.720
There's shares of stock and so if the corporation earns profit and retains the earnings, the stock prices rise.

659
00:57:41.720 --> 00:57:48.220
The capital gain that depreciates to the shareholder is income.

660
00:57:48.220 --> 00:57:58.020
As he points out, there's one situation under which this gain would not be income.

661
00:57:58.020 --> 00:58:08.980
And that would be if the taxation of capital gains is not on a cruel basis, but on a realized basis, like it is in our system.

662
00:58:08.980 --> 00:58:12.620
Then the capital gains tax becomes a tax on accumulated capital.

663
00:58:12.620 --> 00:58:19.660
So in other words, if you don't pay the capital gains tax until you sell and realize the capital gain from your investment,

664
00:58:19.660 --> 00:58:25.160
then the capital gains tax is a tax on accumulated capital and not an income tax.

665
00:58:25.160 --> 00:58:28.160
And this would, in fact, make a difference.

666
00:58:28.160 --> 00:58:34.680
The other point that he makes about this is that there would be one difference between

667
00:58:34.680 --> 00:58:44.000
taxing corporate income, taxing profit, corporate income, and taxing capital gains.

668
00:58:44.000 --> 00:58:52.160
And this is that capital gains would include also speculation of the anticipation of earning

669
00:58:52.160 --> 00:58:57.860
and Profit in the Future, whereas the actual profit of the corporation then would not include that.

670
00:58:57.860 --> 00:59:03.160
So there is a – that difference between those two forms.

671
00:59:03.160 --> 00:59:07.460
And then he points out that there are certain difficulties, of course, involved in capital gains, taxes.

672
00:59:07.460 --> 00:59:14.060
If you want uniformity of the rate, this would be appraisal of the value of assets if they're not often sold,

673
00:59:14.060 --> 00:59:17.760
adjustments for changes in the PPM and so on.

674
00:59:17.760 --> 00:59:21.460
Okay, then he goes on to taxes on accumulated capital.

675
00:59:21.460 --> 00:59:24.400
This section is somewhat shorter.

676
00:59:24.400 --> 00:59:28.860
It points out the main difference here, this is an important distinction.

677
00:59:28.860 --> 00:59:33.040
The main difference here is that when you tax accumulated capital, you actually tax

678
00:59:33.040 --> 00:59:37.280
then the capital structure itself.

679
00:59:37.280 --> 00:59:45.380
And so you begin to give this disincentive to the maintenance and restoration of the

680
00:59:45.380 --> 00:59:47.420
capital structure itself.

681
00:59:47.420 --> 00:59:52.260
Whereas when you're taxing income, you're just taxing the ability people have to accumulate

682
00:59:52.260 --> 00:59:54.700
additional capital, right?

683
00:59:54.700 --> 01:00:00.220
But if you tax their capital, then you're actually destroying or forcing them to consume capital.

684
01:00:00.220 --> 01:00:01.620
So this is much worse.

685
01:00:01.620 --> 01:00:06.820
Taxing accumulated capital is worse for the economy, for our satisfaction of our preferences

686
01:00:06.820 --> 01:00:08.820
than taxing income.

687
01:00:08.820 --> 01:00:11.380
Other things the same.

688
01:00:11.380 --> 01:00:17.020
Now as far as Grotutus transfers as a form of this, he points out that inheritance taxes

689
01:00:17.020 --> 01:00:18.780
These are particularly bad.

690
01:00:18.780 --> 01:00:27.980
This is because every asset eventually has to be taxed under this system.

691
01:00:27.980 --> 01:00:30.200
And so everything is eventually taxed.

692
01:00:30.200 --> 01:00:34.100
This destroys the ability of families to, or impinges upon the ability of families to

693
01:00:34.100 --> 01:00:36.560
accumulate capital.

694
01:00:36.560 --> 01:00:43.420
It has detrimental effects on charitable activity, on intergenerational family relationships

695
01:00:43.420 --> 01:00:44.420
and so on.

696
01:00:44.420 --> 01:00:54.420
Then he gets to the property tax, this, he says, the property tax is levied on property itself and not on the person who owns the property.

697
01:00:54.420 --> 01:00:57.420
That would then be a personal wealth tax.

698
01:00:57.420 --> 01:01:01.420
With a property tax there are two types, partial and general.

699
01:01:01.420 --> 01:01:08.420
The key thing about a partial property tax is that the partial property tax would lead to tax capitalization.

700
01:01:08.420 --> 01:01:14.660
and tax capital. He gives an example of this as well. We'll just quickly run

701
01:01:14.660 --> 01:01:20.820
through his simple algebraic example here. But the basic idea is that if you

702
01:01:20.820 --> 01:01:25.780
if you just tax let's say a particular parcel of land or just some group of

703
01:01:25.780 --> 01:01:32.480
let's say you tax land that's growing soybeans then what would happen of

704
01:01:32.480 --> 01:01:37.720
course is that investors who you know are assessing the value of investing in

705
01:01:37.720 --> 01:01:48.360
and the land that's producing soybeans would reduce their bids for the land that produces the soybeans.

706
01:01:48.360 --> 01:01:50.960
And that's what he means by capitalization, right?

707
01:01:50.960 --> 01:01:55.080
The tax would actually affect the capital value of the asset being taxed.

708
01:01:55.080 --> 01:02:00.800
And it would do so to the extent that the rate of return that's earned in the economy on that,

709
01:02:00.800 --> 01:02:05.840
on the soybeans and the rest of the economy would be equalized again,

710
01:02:05.840 --> 01:02:08.240
just as it was before the tax was levied.

711
01:02:08.240 --> 01:02:10.240
And so here's the simple case that it is.

712
01:02:10.240 --> 01:02:14.540
Let's say we have a parcel of land as a capital value of $10,000.

713
01:02:14.540 --> 01:02:16.240
The interest rate is 5%.

714
01:02:16.240 --> 01:02:23.240
So it's generating a rental value of $500 every period.

715
01:02:23.240 --> 01:02:25.640
So in this simple example, right, we just take the interest rate

716
01:02:25.640 --> 01:02:29.240
multiplied by the capital value and we get the rent.

717
01:02:29.240 --> 01:02:31.840
This is a perpetuity.

718
01:02:31.840 --> 01:02:34.140
It's generating this rent forever into the future.

719
01:02:34.140 --> 01:02:37.160
So the simple formula is adequate to cover the case.

720
01:02:37.160 --> 01:02:39.060
So let's say the state comes along,

721
01:02:39.060 --> 01:02:42.820
assesses a tax of 1% of the capital value.

722
01:02:42.820 --> 01:02:44.740
Now the relationship changes, right?

723
01:02:44.740 --> 01:02:46.400
Algebraically, we would have the interest rate

724
01:02:46.400 --> 01:02:49.280
multiplied by the capital value as the net return,

725
01:02:49.280 --> 01:02:51.500
the gross return minus the tax.

726
01:02:51.500 --> 01:02:53.460
So that gives us this.

727
01:02:53.460 --> 01:02:56.060
We can solve that algebraic formula.

728
01:02:56.060 --> 01:02:57.460
We come down here.

729
01:02:57.460 --> 01:03:00.400
If we solve for the capital value

730
01:03:00.400 --> 01:03:01.980
in terms of the rate of return,

731
01:03:01.980 --> 01:03:04.540
Interest Rate and the Tax Rate.

732
01:03:04.540 --> 01:03:07.580
So if it's generating the same rent of $500,

733
01:03:07.580 --> 01:03:12.980
the capital value now is reduced to $8,333.33.

734
01:03:12.980 --> 01:03:16.020
The tax would be 1% of that.

735
01:03:16.020 --> 01:03:18.100
The return then would be the $500,

736
01:03:18.100 --> 01:03:21.080
the rent would be the $500 minus the tax.

737
01:03:21.080 --> 01:03:23.820
So the net rent is $416.67.

738
01:03:23.820 --> 01:03:26.660
That net rent is a percent of the capital,

739
01:03:26.660 --> 01:03:29.020
the lower capital value is the 5%, right?

740
01:03:29.020 --> 01:03:30.860
So you're just running through a quick illustration

741
01:03:30.860 --> 01:03:33.360
of how this would, you know, what the outcome of this would be.

742
01:03:33.360 --> 01:03:39.360
But the logic is just based upon the economics we've gone through before.

743
01:03:40.360 --> 01:03:43.360
Now, I point to there's certain implications of this, right?

744
01:03:43.360 --> 01:03:47.360
Current holders of land would be affected.

745
01:03:47.360 --> 01:03:50.360
They would be the ones who fill the burden of this tax, right?

746
01:03:50.360 --> 01:03:54.360
When the tax is levied, the value of their land would drop.

747
01:03:54.360 --> 01:03:57.360
So they suffer the full burden of this.

748
01:03:57.360 --> 01:04:00.360
Others who come in later and invest in the land would not, right?

749
01:04:00.360 --> 01:04:04.200
Right? They get the same rate of return as they would anywhere in the economy.

750
01:04:04.200 --> 01:04:07.000
By the way, this also works in reverse for subsidies.

751
01:04:07.000 --> 01:04:12.200
If you have land subsidies, then the person who owns the land at the beginning,

752
01:04:12.200 --> 01:04:16.760
well, that person gets the full benefit forever into the future, right?

753
01:04:16.760 --> 01:04:20.040
The full anticipated benefit of that subsidy.

754
01:04:20.040 --> 01:04:22.120
Anybody who invests later on doesn't.

755
01:04:22.120 --> 01:04:27.720
This is why farm subsidies, for example, don't do farmers any good.

756
01:04:27.720 --> 01:04:29.800
They don't actually benefit them over the long run, right?

757
01:04:29.800 --> 01:04:35.760
They give them a one-time capital gain, but then their operation is just the same as it was before.

758
01:04:35.760 --> 01:04:42.240
Same here, the one-time loss, then the operation is restored, its economic calculation is restored.

759
01:04:42.240 --> 01:04:45.280
Now, of course, the allocation isn't exactly the same, right?

760
01:04:45.280 --> 01:04:50.160
If the government is taxing soybean production, you know, land just producing soybeans,

761
01:04:50.160 --> 01:04:54.520
then, of course, there'll be exodus from that production process, right?

762
01:04:54.520 --> 01:04:58.360
So in the interim, what Rothbard's not showing in this example is farmers would –

763
01:04:58.360 --> 01:05:02.360
Some of them would take their land out of soybeans, shift into corn and so on.

764
01:05:02.360 --> 01:05:10.360
So we'd get, again, a misallocation and a less full satisfaction of consumer preferences.

765
01:05:10.360 --> 01:05:15.860
Then, let me point out, then, the general property tax, of course, would not be capitalized, right?

766
01:05:15.860 --> 01:05:21.860
Because there's nowhere to shift, right? There's no – well, Rothbard's assuming that we just –

767
01:05:21.860 --> 01:05:24.660
we're just looking at a domestic economy.

768
01:05:24.660 --> 01:05:30.460
If the United States government were the only government that levied a general property tax,

769
01:05:30.460 --> 01:05:32.860
then we'd have exodus to foreign countries.

770
01:05:32.860 --> 01:05:36.660
And we would have some re-equal, we would have some capitalization of that.

771
01:05:36.660 --> 01:05:42.260
But if we just had one tax again on all property everywhere at the same rate,

772
01:05:42.260 --> 01:05:44.460
then there wouldn't be anywhere to move, right?

773
01:05:44.460 --> 01:05:47.160
And so the rate of return would have to be reduced,

774
01:05:47.160 --> 01:05:51.160
and saving and investing would be reduced commensurate with this.

775
01:05:51.160 --> 01:05:55.360
And then finally he mentions the personal wealth tax.

776
01:05:55.360 --> 01:06:01.160
This is a tax on the person that has to be paid out of his wealth.

777
01:06:01.160 --> 01:06:07.160
And as he points out, this could be, this would have the general effect that he mentioned before

778
01:06:07.160 --> 01:06:15.060
of if the person has to pay out of his accumulated wealth in order to meet the tax burden,

779
01:06:15.060 --> 01:06:17.660
then this would actually begin to destroy the capital structure.

780
01:06:17.660 --> 01:06:21.300
He's consuming his capital now. The value of his capital is actually falling.