Saturday, April 23, 2011

Who Really Pays Taxes

Steven Landsburg, at "" considers the issue of Mr. Robert Kendrick, who, though wealthy, does nothing but drive and park his four cars. Can Mr. Kendrick be taxed? Steven Landsburg says no. Many others say yes.

Mr. Landsburg is drawing a distinction between the nominal and the real. They are too often confused. Nominally, Mr. Kendrick can be taxed, and nominally everyone else is better off. However, Mr. Kendrick cannot be taxed of real resources, because he basically doesn't produce any, so nobody is really any better off. Good.

More generally, (really) only production can be taxed: All taxation is a transfer of production, goods and services, to the government. Consumption cannot (really) be taxed, since it is still a transfer of what is produced away from the consumer and to the government, which then consumes. Consumption can only nominally be taxed. For example, were we to tax Mr. Kendrick to such degree as to change his behavior, on the whole, there would still be no net improvement in the economy. Any real improvement in the rest of the world would be less than Mr. Kendrick's loss.

Further, (really) only consumption, demand, can be subsidized: All subsidy is a transfer of demand, that is, consumption of goods and services, from one producer to another, through the instrumentality of the government. Due to handling expenses, the subsidy is always less than corresponding tax, that is, on the whole, an economy is always, in the present, worse off for a subsidy. This is not to say a nominal subsidy need be useless. For example, when the subsidy goes to develop infrastructure, that is future production, an economy may be better off in the future.

Above xposted to:

To continue: An economy is a transfer of production to consumption, of producer to consumer. However, producers are also consumers, and must get back a certain percentage of their real production in order to survive and expand. The various mechanisms of an economy may prevent producers retaining this percentage, in which case, a nominal subsidy may be necessary to compensate. This combination of processes is, however, less efficient than just letting producers retain sufficient resources on their own account. For instance, labor, particularly low wage labor, is increasingly coming under subsidy, as eg earned income tax credit, and in the future, ‘universal health care.’ It is more efficient simply to arrange that they are paid more. However, this seems to be politically infeasible.

From the above, it should be clear that the real, or essential, tax base is much smaller than the nominal, or apparent, tax base. This is because most labor, and most industry are involved in activities which are essentially non-productive, in the most basic sense. The financial services sector, for instance, cannot really be taxed, because it produces nothing real. Government employees, for instance, cannot really be taxed. Neither can Calvin Klein or Brad Pitt. Or your neighborhood plumber. Unless the government directly uses their services, their production, and is not buying these services, the government is merely transferring other, more basic production, away from them and to itself. They are not part of its real tax base, however much a part of its nominal tax base they may be. The government, for instance, cannot really tax the military industrial complex. It can, and must, tax those industries whose production goes into sustaining that complex. The production of steel and coal and electricity can be taxed, but the production of a jet fighter engine cannot be. The engine is instead really paid for by the steel and coal and electricity and labor, and whatever else goes into it, that the government had collected as real tax. This is clear because what ever nominal taxes are charged to the jet engine will merely be added to the (nominal) bill the government pays for it.

So, are you really taxed, that is do you directly contribute to your government, or are you just nominally taxed, and your welfare reduced somewhat by the transfer of demand, and thus resources, away from you? Probably (mostly, if not all) the latter.

Thus your complaint is not that the government takes too much from you, since it takes nothing. It is merely that it does not allow you to keep for yourself as much of what others have produced as you would like.

--- Further consideration has led me to the conclusion that real assets can be taxed, since all real assets have previously been 'produced.' Thus, taxes on Mr. Kendrick's nominal wealth, which represents a demand on real wealth, would represent a real transfer of wealth from Mr. Kendrick to the government. However, Mr. Landsburg's point that the government spending this would leave everyone else a little worse off is still correct. But so too if Mr. Kendrick had just taken the money and spent it himself.

A point of MMT, however, if I have it correct, is that the purpose of taxes is not to raise revenue. The government can spend its currency as it wishes. (Nominal) taxes are to maintain a demand for that currency, and to destroy excess demand in that currency, that is, to maintain the value of that currency, ie fight inflation. According to MMT, then, the real cause of inflation is a lack of political will. ---

1 comment:

  1. Not sure about "efficiency" in economics. Grease gets used up; that's why things have grease fittings. But money doesn't get used up.

    The inefficiency involved in government transfers is the cost of doing government. So? Somebody still got that money as income. It didn't just disappear.

    I probably didn't say it very well...