I should have known, but I just found out that another FairTax bill was introduced in Congress last month. John Linder (R-GA) introduced H.R. 25, “The FairTax Act of 2007,” on the first day of the 110th Congress. There are 55 cosponsors. The numerous problems with this “permission-to-live” tax, as Murray Rothbard described consumption taxes, I have already explained here, here, and here.
Rothbard sums things up nicely: “There can be no such thing as ‘fairness in taxation.’ Taxation is nothing but organized theft, and the concept of a ‘fair tax’ is therefore every bit as absurd as that of ‘fair theft.’”
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Sasha – Consumers ** must ** ultimately pay all costs if consumers are sovereign: everyone is a consumer – including businesses – so a business failure is also a reduction in (the investor’s) consumption. Thus (in the end) ‘consumers pay all costs’. That is a necessary implication to the Austrian theory.
A particular consumer might refuse to pay a price to a particular business sufficient to absorb costs, but that loss will be born by the investors in the business, who will not gain the ability to increase their consumption as they originally wished.
That is why consumption can only rise in a (relatively) free capital market; the choices made in investment affect the ability of economic actors as a whole to consume.
(There is a serious deficiency in the theory here – are there “real” profits if people go mad and consume everything so that they perish? There’s something to be said for objective values …)
JIMB,
You are misinterpreting Rothbard again. According to the Man, no one aims to price at MC=MR, and I explained why would aiming at that point be illogical… Plus you’re absolutely wrong: Austrian theory does not imply that consumers pay every single cost of businesses, since many of them go bankrupt. But anyway…,
You ask: “who IS compensating the business for their costs after all?”
In many cases, the answer is: NO ONE, and they go bankrupt, or many surviving firms don’t recover their total cost, but they still stay in business (since they can pay for their variable cost).
Our disagreement comes from the fact that you are trying to deny market reality, as well as basic economics:
Sellers can only set their output (supply) – while prices get formed when that supply interacts with consumers demand. It is prices (revenue) that gets passed onto sellers costs – not vice versa.
Again, I didn’t understand most of what you tried to say, but if you still try to (incorrectly) imply that sellers unilaterally set the prices – it can’t be good.
Sasha – In my view, these posts just aren’t being read. The main criticism is ‘costs are not passed forward’ for ANY firm is demonstrably false. The phrase ‘passing costs forward’ means adding new costs to the price or pricing cost plus margin and finding the market will bear the (new) price.
It means nothing else. It doesn’t mean ‘cost determines price’. It doesn’t mean ‘costs are goods that can be traded’. It doesn’t mean ‘historical costs are paid by transactions’. It doesn’t mean ‘consumers have to pay the price increase’. It means that the the discovered market price covers the firm’s historical (raised) costs.
And consumers do pay the additional costs of many firms – it happens all the time. It is a factual reality. In other words, MC != MR. You cannot assume away the market price discovery process by asserting apriori MC = MR which is not necessarily true (especially in light of inflations and disinflations and deflations) and then continue to ‘prove’ that what just happened (cost increases passed on in higher prices) couldn’t have!
It’s circular anyway. MC = MR already necessarily implies ‘costs can’t be passed on’ so one can’t start with that and call it a proof.
JIMB,
In order to prove that ANY firm is “passing” anything forward in pricing process, you have to prove that a firm is setting the market price. That’s the only way you can prove that they “pass” anything during the price formation. Unfortunately for you, NO FIRM SETS THE PRICE, since they are formed by demand that meets some already produced supply.
Like said before, the price (revenue) gets passed back to a seller’s cost, not vice versa. That’s why market prices are eliminating those sellers when price is not greater than average variable cost.
PS
Your MC=MR talk is incoherent and irrelevant. Either you prove impossible – that any firm is setting market prices (as you initially claimed) – or simply stop with nonsense about “passing” anything forward when it comes to prices, which are out of sellers’ hands.
Sasha – Which happens every time the firm raises prices to cover costs and the market accepts the higher prices for goods or services (it is discovered that $5 increase in price causes less than $5 loss in revenue).
re: In order to prove that ANY firm is “passing” anything forward in pricing process, you have to prove that a firm is setting the market price.
JIMB,
Often time, there is an increase in cost (supply eventually drops, not immediately!) – but demand is also decreasing. As a result, you don’t have to have an increase in price.
Firm is not “raising” anything – it is market that raises prices. If a firm tries to charge beyond that market price, it will get stuck with surplus.
Once again, it is demand at a given supply that sets the price. Sellers cost is only one of the determinants of supply – not price.
JIMB said: “(it is discovered that $5 increase in price causes less than $5 loss in revenue).”
===
What do you mean by this? Trying to joke?
Sasha – Look at it this way: the firm is now (because of market changes) underpricing it’s product. They are “setting” the price under the new market level (and they are, in this case, determining the price) and MC > MR.
The FairTax proposal, excluding it’s other problems, is exactly this situation. Higher cost meets higher demand. Two things are changing at once …
No, it’s not a joke if we are talking MC, MR analysis: $5 increase in price causes less than $5 decrease in revenue for the marginal unit so there is a net gain across all the ‘prior’ units sold.
JIMB,
NO, I will not look at it that way. Firm is not pricing anything. Market is forming prices – which may or may-not cover a firm’s cost. In other words: firm is not passing anything forward – it is the market price that is passed to its cost.
Your MC, MR is a total joke, but it’s even irrelevant to our topic.
Allow me to use Hoppe’s interpretation of Rothbard http://mises.org/etexts/hhhonmnr.asp :
“Production, as explained Rothbard, precedes the sale of final products, and production costs must be incurred before consumers can demonstrate their preference for one’s products. Cost curves on the one hand and the demand and revenue curves on the other do not exist simultaneously! The only curves that exist simultaneously with cost curves are entrepreneurially estimated FUTURE demand and revenue curves.
However, in deciding on the quantity of goods to be produced, every producer will always set his output so as to maximize his expected money earnings, ceteris paribus.”
In other words – firms are setting the output (supply) not prices. Therefore, firms cannot pass anything forward in pricing process, since that’s out of their hand once they display their supply.
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I’ll just be brief with some points…
Under the Fair Tax:
You get your entire paycheck (Gross Pay)…
A Family of Four get a Monthly Prebate Check (About $500.00) determined by the poverty level…
Consumption Tax Paid on “NEW” Items only!…
That $100.00 NEW Jacket will still cost about $100.00 under the FairTax…
What’s different? The wholesale cost of the jacket…
Instead of paying $50.00 wholesale for the new jacket the retailer pays $25.00 wholesale for the new jacket…
Then the retailer stills sells the jacket for $100.00 to the consumer and then sends the $25.00 wholesale savings to the government….
No Double Taxation like now on used items….
The FairTax also stipulates that the 16th ammendment MUST BE repealed!
Reading Lawerence, Rothbard, Sasha and JIMB leads me to believe economists are flawed.
Sasha you present your arguements very well, for a university setting. You might be in business, but must be insulated from decision making when it comes to competitive pricing.
JIMB sounds like a business man in the real world, with a great understanding of economics. I would like him to work out his arguments why the Fair Tax is unworkable. The writers of the Fair Tax welcome it, so they can improve it, or educate others on what they do not see in the plan.
It is not how well you understand it that is important, for 290 million Americans are not going to. They do understand basic concept of fairness, hence Rothbard wisely calls the Fair Tax a Tax on Living. He is appealing to emotion. No need to understand if your first emotion is based on the government taxing you to live.
Proponents of the Fair Tax (I am) will tell you what Stanley above me did. Much of it is on emotion, no filing of paperwork, and people who do not pay now, will pay some tax. That is the Fair behind the Fair Tax. More of the population actually pays into it than currently do. Long time taxpayers are fed up with free loading non tax payers.
To Ron Paulers, paying any tax may not be fair or constitutional, but we do now. So while we pay it, let us have more people pay, which might cause them to appreciate gov service more. This is an increase in fairness, plus it repeals the 16th Ammendment, which by itself will not solve all your complaints, but it is a bigger step than what has been accomplished so far.
To Libs and Dems, this is the most progressive tax ever. Read to book to see how. Tax revenue will not go away, just collected differently. Collected from all people. Despite the technicalilty that Sasha states. (Sasha as of her last post still has to put together a few concepts, outside the legal box) When she does, she might be the Fair Tax’s biggest supporter. Like a former smoker, bugging current smokers.
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