During the first week of March Fed Chairman Alan Greenspan aired his views on tax reform in front of Bush’s appointed panel on the topic. Greenspan advocated the introduction of consumption taxes, to which I replied with this letter to the Financial Times of London.Sir-Federal Reserve Chairman Alan Greenspan’s comments advocating the introduction of a consumption tax represents not reform but a repackaging of the status quo (“Greenspan calls for consumption tax”, March 4). Indeed, the tax reform movement’s quest for simplicity defies economic sense.
Mainstream economists and politicians fail to grasp that every tax impairs economic activity. Concerning consumption taxes, the seller is incapable of passing the excise on to patrons, whose decision to purchase a product is predicated on the full price, including the tax. Because the law of demand dictates that individuals buy less of a product as its price rises, a consumption tax falls squarely on sellers, crimping the profitability of firms all the way up the chain of production.
Tax reformers also contend slashing marginal rates and introducing a flat tax-as some Central and Eastern European countries have done- is a prescription for robust economic growth.
However, tax reformers are not clamouring for a reduction in the level of taxation, but a mere reshuffling of burdens. There is no simple, innocuous or fair ways to extract by force roundabout $2 trillion a year from American taxpayers. It is indisputable that taxation in whatever guise is distortionary, for it deprives individuals a portion of the money they would otherwise employ to consume or save, placing the loot in the hands of individuals only nominally accountable at the ballot box.
Hence, $2 trillion is absent from America’s private economy -the engine of growth- with only ballot papers and inefficiently provided government services as recompense.
As for the aforementioned European countries, stellar growth rates are less a function of the tax system than competitive wages. Taxes, chiefly consumption, income and payroll, annually confiscate 30% or more of their subjects’ property.
No tax reform reduces distortions or augments growth unless some taxes are abolished and corresponding spending cuts are enacted. Absent these conditions taxpayers are wise to clench their pocketbooks when government luminaries, whom live by tax dollars themselves, broach the topic.
-Grant M. Nülle
Ludwig von Mises Institute
Regrettably, the letter was not published -as my submissions to the FT usually are. It is nonetheless here on display for the Mises.org audience.
For a more thorough and extended treatment of Bush’s tax reform racket, consult Lew Rockwell’s article on the subject http://mises.org/daily/1727
As for the taxonomy, no pun intended, of the methods utilised by the state to confiscate private property and how each tax uniquely distorts the free market, Rothbard’s timeless classic, Power and Market http://mises.org/rothbard/mes/chap16a.asp, is the ticket.