At the Mises Institute Supporters Summit:
At the Mises Institute Supporters Summit:
The response of several businessmen to the upcoming implementation of Obamacare has made quite a splash. Both John Schnatter of Papa John’s Pizza and Denny’s franchisee John Metz announced that the law would impel them to cut employee hours and raise customer prices, which is fair enough.
However, they erred when they both claimed that through such price hikes they would be “passing on” the costs of Obamacare to the consumer. Their error was not only strategic (“Passing on costs to consumers? What heartless, selfish capitalists!”), but conceptual. Rothbard demonstrated in Power and Market that the notion of such “forward tax/cost shifting” is fallacious:
“The idea that the increased cost will be passed on to the consumer by the employer is an illustration of perhaps the single most widespread fallacy on taxation: that businessmen can simply shift their higher costs forward onto the consumers in the form of higher prices. All the economic theory expounded in this book shows the error of this doctrine. For the price of a given product is set by the demand schedules of the consumers. There is nothing in higher costs or higher taxes which, per se, increases these schedules; hence, any change in selling prices, whether higher or lower, will decrease the revenues of the business involved. For each business, on the market, tends to be, at all times, at its “maximum profit point” in relation to the consumers. Prices are already at their point of maximum return for the business; therefore, higher taxes or other costs imposed on the firm will reduce their net incomes rather than be smoothly and easily passed on to consumers. We thus arrive at this significant conclusion: no tax (not just an income tax) can ever be shifted forward.
Suppose that a particularly heavy tax—of whatever type—has been laid on a specific industry: say the liquor industry. What will be the effects? As we have noted, the tax will not simply be “passed on” to the consumers. Instead, the price of liquor will remain the same; the net income of the firms will decline. This will mean that returns will be lower to capital and enterprise in liquor than in other industries of the economy; marginal liquor firms will suffer losses and go out of business; and, in general, productive resources of all types will flow out of liquor and into other industries. The long-run effect, therefore, is to decrease the supply of liquor produced, and therefore, by the law of supply and demand, to raise the price of liquor on the market. However, as we have said above, this process—this diffusion of suffering over the economy—is hardly “shifting.” For the tax is not simply “passed on”; it only permeates to the consumers through hurting the industry taxed. The final result will be a distortion of the factors of production; fewer goods are now being produced than the consumers would prefer in the liquor industry; and too many goods, relatively to liquor, are being produced in the other industry.”
The hunt for deductions, exemptions, and loopholes to eliminate, undertaken by The Economist (as seen in my last post) and other “free-market” advocates, is part of the never-ending quest to “broaden the tax base”, which has been a fixture of Republican economic policy for decades. Mitt Romney referred to it repeatedly in his presidential campaign, and it was a major plank of “Reaganomics.”
“Broadening the tax base” is also part of the Republican holy grail of “revenue neutrality”, which Grover Norquist underlined once again on November 16:
Romney’s plan was always revenue-neutral — I’m in favor of getting rid of deductions and credits and reducing rates, as long as it’s revenue-neutral. That’s always been the Republican position.
Rothbard pointed out the folly of “revenue neutral” deal-making back in 1993 in the Rothbard-Rockwell Report:
The last time that “free market economists” played such a repugnant role was in the 1986 “tax reform,” engineered by Jacobin egalitarian economists in the name of “fairness,” “equality,” and free markets. (Tip: genuine free markets have nothing to do with “equality,” and nothing whatever to do with modern leftist notions of “fairness.”) The “social compact” devised by the 1986 Republican Jacobins was to cut upper income tax rates in exchange for “closing the loopholes,” “broadening the tax base,” and thereby keeping everything “revenue neutral.” (Query: what’s so great about keeping tax revenues up, the eternal aim of supply siders? Why not drastically lower tax rates and tax revenues? Isn’t that the real free-market position?)
Well, they closed the loopholes all right, thereby leveling a blow to the real estate market from which it has still not recovered. Thanks, Jacobins. And, as some of us predicted without being heeded in 1986, it took only a few years for the upper income tax rates to be raised again.
Twenty-six years later, the ineducable supply siders are looking to make the same mistake all over again, and it will likely bear similar fruits. Even if “tax broadening” garners concessions concerning “tax hiking”, those concessions will likely ultimately be reversed, and we will end up with a tax structure that is both broader and higher.
Congress is desperately searching for the brake as the Federal government rapidly approaches the year-end “fiscal cliff.” The chief element of President Obama’s plan to keep from going over the edge is to raise taxes on the “rich.” Predictably, he claimed on November 14 that his re-election gave him a clear mandate on the issue:
But when it comes to the top 2 percent, what I’m not going to do is to extend further a tax cut for folks who don’t need it, which would cost close to a trillion dollars. (…)
I mean, this shouldn’t be a surprise to anybody. This was — if there was one thing that everybody understood was a big difference between myself and Mr. Romney, it was, when it comes to how we reduce our deficit, I argued for a balanced, responsible approach, and part of that included making sure that the wealthiest Americans pay a little bit more.
“A little bit more” is a little bit rich, given that if the “Bush tax cuts” expire, the two top marginal rates will go from 33% and 35% to 36% and 39.6%. As Ludwig von Mises explained in Human Action, such confiscatory taxation of higher incomes harm not only those taxed, but working men and women as well:
The greater part of that portion of the higher incomes which is taxed away would have been used for the accumulation of additional capital. If the treasury employs the proceeds for current expenditure, the result is a drop in the amount of capital accumulation. (…) Thus the accumulation of new capital is slowed down. The realization of technological improvement is impaired; the quota of capital invested per worker employed is reduced; a check is placed upon the rise in the marginal productivity of labor and upon the concomitant rise in real wage rates. It is obvious that the popular belief that this mode of confiscatory taxation harms only the immediate victims, the rich, is false.
The Economist Magazine assured us in their November 17 edition that such a tax hike “would hardly capsize the economy”, however it advises a more “efficient way to raise revenue.”
It would be better to revamp the tax code, starting out by leaving marginal rates alone and instead raising revenue by curbing the deductions and exemptions that pockmark the system and cost the Treasury as much as $1 trillion a year in forgone revenue. These “tax expenditures” are camouflaged government subsidies and create damaging distortions: the mortgage-interest deduction, for instance, encourages supersized houses and debts to match; the charitable deduction forces taxpayers to subsidise everyone else’s pet cause…
Murray Rothbard dealt with the Orwellian twisting of language involved in referring to deductions and exemptions as “subsidies” in Power and Market:
Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master. It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone.
In the literature on taxation there is much angry discussion about “loopholes,” the inference being that any income or area exempt from taxation must be brought quickly under its sway. Any failure to “plug loopholes” is treated as immoral. But, as
Mises incisively asked:
“What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. . . . The income tax exemptions in our income tax are not loopholes. . . . Thanks to these loopholes this country is still a free country.”
Danny Sanchez, in a Circle Bastiat post ,”Yes, Rothbard Covered That: Wealth Tax Edition, used Rothbard to criticize yet another proposal to fight the imaginary evil of the left, income or wealth inequality (See Daniel Altman New York Times column, “To Reduce Inequality, Tax Wealth, Not Income).
Rothbard’s conclusion re a wealth tax:
“It is clear that the wealth tax levies a heavy penalty on accumulated wealth and that therefore the effect of the tax will be to slash accumulated capital. No quicker route could be found to promote capital consumption and general impoverishment than to penalize the accumulation of capital. Only our heritage of accumulated capital differentiates our civilization and living standards from those of primitive man, and a tax on wealth would speedily work to eliminate this difference. The fact that a wealth tax could not be capitalized means that the market could not, as in the case of the property tax, reduce and cushion its effect after the impact of the initial blow.”
Sudha Shenoy, in one of her last refereed journal articles, “Investment Chains Through History” (published in the Indian Journal of Economics and Business, (Special Issue ( 2007) edited by myself and Alex Padilla), provides historical data that supports the argument that it is ever more complex investment chains (structure of production) which are the embodiment of the accumulated capital that is the key to higher standards of living both now and in the past. As Hayek reminds us, but often missed in mainstream analysis, any capital structure must be continuously replaced and replenished just to maintain an income flow; investment must exceed replacement for prosperity to advance.
Technology is widely seen as the key to development. But this does not explain how a single innovative machine multiplies itself. An alternative tack: Menger’s analysis of investment chains. Begin with first-order (consumer) goods and examine the second, third-, and other successively higher-order goods required. The range of final goods produced in four historical contexts (Upper Palaeolithic Europe, early modern England, DCs in the late 20th century, Mali in the same period) are set out. In each context, for a selected first-order good, the investment chain of successively higher order goods is detailed. Such investment chains are most complex in DCs.
This attack on property rights, a proposed wealth tax, in the name of fairness, is just another example of the many factors impeding recovery of investment because of the current high level of uncertainty; policy uncertainty, economic uncertainty, but most important regime uncertainty (here and here).
In this case however, adopting such a policy, a wealth tax, would reduce or eliminate a portion of the regime uncertainty, but the effect, whether intended or unintended, would be more harmful to future prosperity than the uncertainty.
Rothbard explained in Power and Market why a “wealth tax” would be particularly pernicious (see his conclusion in bold below):
Although a tax on individual wealth has not been tried in practice, it offers an interesting topic for analysis. Such a tax would be imposed on individuals instead of on their property and would levy a certain percentage of their total net wealth, excluding liabilities. In its directness, it would be similar to the income tax and to Fisher’s proposed consumption tax. A tax of this kind would constitute a pure tax on capital, and would include in its grasp cash balances, which escape property taxation. It would avoid many difficulties of a property tax, such as double taxation of real and tangible property and the inclusion of debts as property. However, it would still face the impossibility of accurately assessing property values.
A tax on individual wealth could not be capitalized, since the tax would not be attached to a property, where it could be discounted by the market. Like an individual income tax, it could not beshifted, although it would have important effects. Since the tax would be paid out of regular income, it would have the effect of an income tax in reducing private funds and penalizing savings-investment; but it would also have the further effect of taxing accumulated capital.
How much accumulated capital would be taken by the tax depends on the concrete data and the valuations of the specific individuals. Let us postulate, for example, two individuals: Smith and Robinson. Each has an accumulated wealth of $100,000. Smith, however, also earns $50,000 a year, and Robinson (because of retirement or other reasons) earns only $1,000 a year. Suppose the government levies a 10-percent annual tax on an individual’s wealth. Smith might be able to pay the $10,000 a year out of his regular income, without reducing his accumulated wealth, although it seems clear that, since his tax liability is reduced thereby, he will want to reduce his wealth as much as possible. Robinson, on the other hand, must pay the tax by selling his assets, thereby reducing his accumulated wealth.
It is clear that the wealth tax levies a heavy penalty on accumulated wealth and that therefore the effect of the tax will be to slash accumulated capital. No quicker route could be found to promote capital consumption and general impoverishment than to penalize the accumulation of capital. Only our heritage of accumulated capital differentiates our civilization and living standards from those of primitive man, and a tax on wealth would speedily work to eliminate this difference. The fact that a wealth tax could not be capitalized means that the market could not, as in the case of the property tax, reduce and cushion its effect after the impact of the initial blow.
Peter Lewin posted some very interesting commentary of Richard Epstein’s distinguished scholar lecture at on-going Southern Economics Association (SEA) meeting. I had the opportunity to hear Epstein several years ago at the Association of Private Enterprise Education meeting and hardily agree with Peter’s assessment that “To hear Epstein talk is awe-inspiring. Hard to describe. Always without notes he delivers intricate, clever, funny, insightful prose without hesitation, seamlessly weaving his web of logic, backwards and forward, while making knockdown points.”
Distinguished Guest Lecture:
“The Implications of the Recent Election for Economic Freedom”
The University of Chicago
Friday, November 16th
This afternoon I heard Richard Epstein talk on the implications of the recent election for the economy. He gave the annual distinguished scholar lecture as the SEA meetings. To hear Epstein talk is awe-inspiring. Hard to describe. Always without notes he delivers intricate, clever, funny, insightful prose without hesitation, seamlessly weaving his web of logic, backwards and forward, while making knockdown points.
What he said today reinforced my conviction that Obama is by far the worse of the two candidates we faced in this election – though both were pretty bad. Epstein’s knowledge of the details of each and every Obama program, the law, the economics, the bureaucracy, … left me with little doubt on this score – and pretty pessimistic for what lies ahead. In addition he has the rather unique advantage of knowing Obama personally from his University of Chicago days.
This is a situation where personality matters a lot. According to Epstein, Obama is the exact opposite of his convivial exterior. He is someone who is extremely unlikely to change his mind on anything and who takes criticism extremely badly. He brings to the White House not your standard self-serving, but flexible politician. He is, rather, someone who is a principled and stubborn believer in policies and values antithetical to the health of the American economy and its civil society. His serious agenda is not the “liberal” agenda of the 1960′s which focused on civil rights; rather it is the agenda of the progressive era in America, which sought by the power of government to redesign society from top to bottom. And you see this in every part of the programs he has already addressed.
Healthcare, Financial regulation, Environmental policy, Protectionism in international trade, Trade unionism, Education, and more. In every case Obama has skillfully constructed a powerful regulatory apparatus. Where he has been able to use Congress he has obtained the legislation he wanted (and designed), legislation deliberately vague, so as to leave as much discretion for the bureaucracy as possible. Where legislation was unnecessary, or unobtainable he has resorted to administrative discretion, issuing decrees often without the necessary Congressional approval. He knows that the regulated companies and organizations have the option of either obeying or taking the government to court, and that the latter is costly inconvenient and risky, so they almost always comply. In this way, little by little, our freedoms are regulated away.
Epstein pointed out that the accumulating regulations act like taxes to sap the creative power of private economic initiatives and when combined with macro tax and spend policies can only have one outcome. The prospect for the future is one of dwindling growth, smaller technological advances, less capital investment in America and slowly declining standards of living, not only for or mostly for the 1% [emphasis mine].
I wish I could do his analysis justice. I can’t even come close. But he has expressed this in parts in various places available on the internet and I will be looking for them so as to be able to share more specific detail.
HT to Professor for sharing his comments.
Epstein’s analysis reinforces Robert Higgs’s Regime Uncertainty arguments relative to recovery and prosperity and fits with some excellent work by Gwartney, Holcombe, and Lawson on the how growth of government relative to the economy retards economic growth. For my analysis in early 2009 see A Free and Prosperous Commonwealth (A pdf link to the Gwarnty et al paper is available in this commentary). Ever more reason to continue to support mises.org’s efforts to advance the cause of liberty.
This would have been a sad day for Murray Rothbard, who loved Wonder Bread (and often used it in examples, as he did here (PDF) and here (audio)). Hostess, the maker of Wonder Bread and Twinkies has folded, thanks to a nationwide strike.
Would syndicalism, distilled by the old slogan, “railoroads to the railroadmen, mines to the miners!” save the day? Mises Daily author Peter Earle (sarcastically) considers the question when he writes,
“The death of Hostess is a shame, but luckily the workers can – according to one theory – “seize the means of production”. I don’t know about you, but I feel confident about the prospects for Twinkie and Ring Ding filler machine operators and straight-job truck drivers filling the CEO and CFO seats.”
Congratulations to the Mises Institute of Canada and its director, Redmond Weissenberger, for hosting the first Toronto Austrian Scholars Conference at the University of Toronto this past weekend, November 9-10. The conference included four sessions comprising fourteen papers, a talk on financial markets by Kel Kelley, and a keynote speech by yours truly. The conference marked the 100th and 50th anniversaries of the publication, respectively, of Ludwig von Mises’s Theory of Money and Credit and Murray Rothbard’s Man, Economy, and State. In keeping with the conference theme, my speech compared Milton Friedman’s interpretations and predictions of the events leading up to the Financial Crisis with those of proponents of the Austrian theory of the business cycle, which was first outlined in Mises’s book and given its modern formulation in Rothbard’s treatise.
The conference was well attended, drawing 60 or 70 people, and the papers were top notch. I will briefly note several papers here.
Professor Andrius Valevicius of Sherbrooke University presented a provocative paper arguing that Genghis Khan’s successful empire building lay in his introduction of low taxes, stamping out of torture, and promotion of religious toleration and diversity and free scholarly inquiry in the conquered territories. The Great Khan also restricted his plundering to the wealth and property of the vanquished ruling elites while leaving their subjects generally unmolested in their persons and property and even distributing some of the plunder among them.
Moin Yahya, a Law professor at the University of Alberta, the academic home of the late Ronald Hamowy, discussed Lysander Spooner and the enduring lessons of his work for contemporary libertarians and anarchocapitalists. J. Huston McCulloch, an outstanding monetary theorist and economics professor at Ohio State University, formulated an original argument supporting a remark by Mises that, contrary to Marx, the Hegelian dialectic is inherently mystical and therefore inconsistent with a purely materialist view of social phenomena. Professor Glenn Fox of the University of Guelph gave a paper that nicely elucidated Carl Menger”s sometimes murky approach to methodology. Finally, I might mention an important paper presented by Professor Pierre Desrochers of University of Toronto (co-authored by Professor Colleen Haight of San Jose State University) that demonstrated how entrepreneurs operating in a free market economy, when left to their own devices, have been routinely transforming industrial pollutants into valuable products since the Industrial Revolution.
Videos of some of the presentations can be viewed here.
William Anderson Walter Block Per Bylund John Cochran Jeff Deist Thomas DiLorenzo Nicolai Foss Gary Galles David Gordon Jeffrey Herbener Robert Higgs Randall Holcombe David Howden Jörg Guido Hülsmann Peter Klein Hunter Lewis Matt McCaffrey Ryan McMaken Thorsten Polleit Joseph Salerno Timothy Terrell Mark Thornton Hunt Tooley Christopher Westley Thomas Woods