Ordinary folk beleive that there are some goods that should always go UP in price; namely houses and wages. Anything that lowers the prices of houses and labour is automatically viewed as evil.

Plans to lower the minimum wage here in Ireland (from 9 to 8 Euros) have fallen to pieces.

Have you ever noticed that the people who cause the most trouble and demonstrate the least amount of initiative in the workplace are the first on line when making demands upon their employers?

Despite the fact that there are far fewer unions than there used to be, I believe that they contributed to the collectivist mentality that everyone is entitled to a job, automatic raises and benefits regardless of performance, ability or attitude.

“The payroll tax is a tax on employment because it is a forced price increase in the wage that everyone hopes to gain. If we eliminated this, we would see the costs of hiring plummet, and the benefit would be experienced directly and immediately by the worker. The worker would not have to lower wage and salary expectations. Instead of paying the government, the worker would be able to add that money to his or her own remunerative calculus.”

Of course they would! And those benevolent employers would gladly hand it over right? Are those the same employers that are shipping every job that isn’t nailed down offshore?

What makes you think that if you lowered taxes by 16% that the employer wouldn’t strong arm that out of the employee? Who has the greater chance of winning the fight, the father that has to feed his family and does not have a lot to choose from or the anyjob manager who can make the guy take the wage he’s offering or let the job not be filled if necessary? Who can win the war of attrition better do you think?

We’re not quite back at the days that recruiters go to high schools to hire boomers like it was in the ’70′s and if companies have their way we never will be again

DavidB,
I am sorry that you are so ignorant of economics, I recommend a healthy dose of Man Economy and State. There is simply no way that the employers as a cartel could maintain withholding the current tax receipts from the workers in the event of the tax’s lapsing. Cartels can not maintain their cohesion in the face of efficient entrepreneurial action. Any shrewd businessman would see that he could offer a slightly higher price to a competitor’s best employees by “sacrificing” some of his “profit” from the “windfall” of the tax’s removal. The bidding of labor prices will tend to eliminate the “windfall” for the capitalists. At the same time, the market price for the goods in question will be reduced and the employees will in not too long of a time span again earn their discounted marginal revenue product. Any actions to the contrary can not survive in the long run. In the event that the post-tax-regime wage is identical to the tax-regime wage, the employees will still have gained because the overall prices of goods have dropped, meaning that the workers’ real wages have risen. To be against tax removal on the grounds that capitalists may make a short run windfall profit is to ignore the long run benefits to worker/consumers. Best of luck with your educational endeavors.

Tell me this Stanley. If the employee is the one with all the power in the equation, why do CEOs earn more than their average employee than ever before?

DavidB: “If the employee is the one with all the power in the equation, why do CEOs earn more than their average employee than ever before?”

Consider the question from the other point of view:

If the employer is the one with all the power in the equation, why does the average employee earn more than ever before?

Tell me this Stanley. If the employee is the one with all the power in the equation, why do CEOs earn more than their average employee than ever before?
I’m not sure if it’s just simple math you’re having a problem with, or if you’re just confusing the current status quo as a ‘free market’.
If it’s just the math, tell me who has the most power: a handful of employers, or thousands and thousands of employees?
If it’s confusion over the status quo, sure, there are laws that big companies manage to get passed by government that help restrict the competition and thus leave employees with fewer options than they would otherwise have. Nonetheless, the laws of economics are not suspended because of governmental laws and regulations–these restrictions limit employee options, but do not entirely remove all possible options–the restricted market still works, just not as effectively as it could if it were truly free. Thus, lowering taxes would still be beneficial to employees, and for the reasons mentioned.
Obviously, removing other restrictions would be even more beneficial to workers. Or perhaps it’s not so obvious, and that’s why economic education is important?

“By this mechanism, the inflationary activities of the Federal Reserve increases the distance between the incomes of wage earners and CEOs of public companies.”

And you think these CEO’s don’t know this? So why, if they have the power to educate the people and change things do these people sit quietly while the Fed does this? Is it possible that these people benefit from this situation?

”If it’s just the math, tell me who has the most power: a handful of employers, or thousands and thousands of employees?”

Ever been to the third world Michael? There are even more employees and fewer employers. Are the wages higher or lower there?

Anyway folks I enjoyed the banter. I have to get off to work now or I’ll be one of those even more desperate employees. Thanks for hearing me out and peace to you all

And you think these CEO’s don’t know this? So why, if they have the power to educate the people and change things do these people sit quietly while the Fed does this? Is it possible that these people benefit from this situation?

Who says that the CEO of General Motors has the obligation to educate anyone? What on earth are you talking about?

Big business gets favors from the federal government. If you take the time to read more around this website, you will find that its supporters are strongly opposed to allowing the government the power to hand out those favors.

Besides, what are you talking about with the “brainwashed” garbage? Me?

Pot-kettle-kettle-pot.

You seem to be in the thrall of some hard-core class-warfare propaganda. You have a cartoon view of CEOs and business and economics generally. If you don’t like $150 Nikes, then buy something cheaper.

Are athletes overpaid? Who are you to say? Maybe in your socialist Utopia, the flashy cars and Hummers and conspicuous consumption would be considered a criminal offense against the proletariat. But, really, the fact that $150 Nikes are your big concern shows that your economic philosophy is motivated by your hatred of modern American culture, not by any form of logical thought or economic analysis.

The world can not run on extremes, regardless of which side of the argument one is on. Problems arise when either side of a given argument becomes fixated on its position and is unwilling to compromise. Abuse arises when either side of the argument has too much power and allowed to freely impose its values and beliefs on the system. As Ron indicated earlier, always look at a sitution from both angles. As I will tell you now: if you do that, you will almost always find that a solution lies somewhere in the middle when it pertains to very complex processes and systems. Pesonally, I would love to not pay any wage taxes at all. But it is not realistic.

fundamentalist is hitting on an important point. Taxes combined with an inflationist monetary policy lead to the devastating effect of unwitting capital consumption. Paper earnings and the tax man contribute to the “rust belt” effect, where replacement costs on durable capital goods with long depreciation schedules are much higher than initially planned for. This has contributed to the loss of many manufacturing jobs as the capital stock is depleted and the productivity and thus discounted marginal revenue product of the American employee falls below the going wage rate on the American labor market for that particular class of job. So if you want another bogeyman to blame for the loss of American jobs, look at the federal reserve, their banking thrall, and the tax men in congress.

I have to disagree with the sentiment that the owners would pocket the profits and then slowly increase capital and thus raise wages. First of all, a tax has two effects, the first and most important is to reduce the earnings of original factors (wages and ground rents), and secondly as supply decreases when marginal suppliers go out of business to increase the cost of a product. When the tax is lifted, the original factors are now free to bid up their sales price to their true DMVP, furthermore, the submarginal suppliers (both entrepreneurs and owners of original factors) can re-enter the market, which will increase supply and tend towards a reduction in price. In this way, workers gain in reduced prices and increased paychecks.

Lower Labor Costs Now!,?. This is not going to happen as long as the Federal Reserve is in existence.
This institution is an Engine of Inflation of the money supply. Congress and the Banks make out like bandits with the help of the FED. They are always fighting Inflation of prices which they create with the Inflation of the money supply and deficit spending. No need to go into Fractional Reserve Banking, another scam that benefits only the bankers who monetize debts. Lately the banks have gotten into trouble by overdoing a ‘good’ thing for them. Now they do all they can to drag-out the mess hoping for normal times.

Lower Labor Costs Now? This would take an act of Congress for it to take effect overall. What should be done is to move the FED out of existence only then would Labor Costs come down of their own momentum. Good try Lew but your thesis will only work with the FED abolished.

@Curt – you would be right about CEO pay if we had a free market with free money, but we don’t.

@Magnus – I completely agree. CEO compensation is largely based on excessive inflation and bubbles the federal reserve puts into place.

And what about the fact that much CEO pay is based on earnings during the upswing of the business cycle which turn out to be massive losses? See Fannie & Freddie, any of the hundreds of mortgage companies that have gone bankrupt in the last several years, the homebuilders, and the banks & investment banks.

Without the Federal Reserve’s interference in the markets, most of these temporary ‘profits’ which the pay is based on could have occurred.

@Stanley – great point about concealed capital consumption. That’s been ongoing for at least a decade. The other thing that drives capital consumption is the ‘wealth effect’ – which drives consumers to consume based on false paper wealth (wealth that will not exist at all after the bubble bursts and the dust has settled)

@Inquisitor – great points – it is the shareholders that are ***** the most by high CEO pay, largely a result of the market not being free.

Daniel, you are right in reminding us that this blog is for educational purposes and that personal attacks are not conducive towards that end. Like the old saying goes, you catch more flies with honey than with vinegar.

DavidB, I appreciate your comments, and I hope that some of the responses have placed a little question in your mind, encouraging you to examine the logic of both sides of the argument. You have encouraged a sharpening of the mind. Thanks.

Also as a clarification on my first post, I would like to say the following. At the termination of the tax, workers and employers will bid up wages which were repressed under the tax. The employer increases wages to obtain and keep the best employees, and employees counter in bargaining with their current and prospective employers. Additionally, formerly sub-marginal employers, workers, and land resources will be profitable and contribute to the discovery of wages in their particular industries and nearest substitutes. Furthermore, the additional supply brought forth from increased competition will lead to reduced prices, but this is most likely a slower effect. Employers will reap a “pure profit” for a period of time, but this is quickly eliminated by competition and from that point forward, only genuine entrepreneurial profits (also transitory in nature) and interest will be had by capitalists.

Let’s say the State were to suddenly refrain from robbing business owners quite as much, and employers suddenly found themselves with more cash than usual.

Under these circumstances, it is impossible to predict how this particular group of people would respond to having the extra cash at that particular point in time. It is impossible for even the people themselves to know how they would react.

Austrian economics tells us that the value that each person puts on this additional cash (i.e., a marginal increase in net income resulting from tax relief) is subjective. “Subjective” is another way of saying that it is beyond the ability of anyone to predict or analyze by mathematical formulae.

No one knows what, exactly, he would do until he is faced with the actual decision of spending or saving actual money, under actual economic conditions as they exist at that time, facing the prospect of paying actual prices. The immediate effect that this change in taxation would have on prices and savings or spending patterns by those businesses is only knowable in hindsight

Some employers would use the money to hire new employees. Some would give raises. Some would save it as profit. Some would buy new equipment. Some would do a combination of all of the above. All would do things slightly differently.

Also, the effect would be dynamic and multi-dimensional — every additional dollar used to hire new employees would bid up the market price for such employees. The same goes for the market for additional equipment, or expanding existing businesses into new territories. The additional savings entering in the economy would alter interest rates.

These secondary and tertiary effects of tax relief are just as unknowable as the primary effects.

“Subjective” doesn’t mean random or chaotic. People in similar situations are subject to similar pressures and incentives. No, they won’t all react the exact same way, but they will react in more or less similar ways.
In any case, no one has yet presented any reasonable argument for not lowering the taxes.

While it is true that the specific beneficiaries are unknown and we can not know an individual’s subjective gain from the end of taxation, we can through logic deduce who, in broad terms, suffers (i.e. where the incidence of the taxation will rest). Rothbard has shown in Power and Market that taxes can not be passed on to the consumer and instead are passed backwards in the form of reduced wages and ground rents. Capitalists wearing their interest earning hats do not bear much of the tax except through the long term changes in the market rate of interest as effected by lower wages to workers. Thus since we know the classes of losers in the taxation regime, we can deduce who will gain the most relative to the conditions of the taxation regime. Certainly in the transition period, there will be individuals who, through entreprenurial skill, as capitalists, workers and/or owners of land resources, will gain more than their peer group average. At the same time, many will struggle with the transition. However, as was stated above, all will be better off as compared to the tax regime save those bureaucrats employed to collect the tax and the other net recipients of the tax largess. Since they will be forced to be productive in their own right, or provide the benefit of psychic gain to their patrons if indigent (also a productive endeavor), they will contribute to the real wealth of the economy and cease being a detriment.

Respectfully, I think it is to the detriment of the discussion surrounding this topic to focus on presenting reasonable arguments for not lowering taxes (although I wholeheartedly agree that no arguments exist).

A proper starting point is what is a reasonable basis for taxing in the first place, and then take things from there. Tabula Rasa is the appropriate starting point!

Daniel,
A reasonable basis for taxation must be based on some ethical foundation. The current academic underpinnings for the state are based on utilitarian grounds. Murray Rothbard and Hans-Hermann Hoppe have examined the ethics of utilitarianism in an attempt to get to the bottom of this very question in the “Ethics of Liberty” and “The Economics and Ethics of Private Property,” respectively. Their conclusion is that utilitarianism fails to meet the standard of a true ethics in that it is not universal. Utilitarianism can result in the killing of redheads if the total psychic gain of society were increased by this action…

Instead they come to the conclusion based on logical deductions from the action axiom of praxeology that private property is the only political ethic that is valid. All actions which uphold private property are permissible, any actions which would infringe on private property are a step in the direction of a non universal ethic and result in either the enslavement of the many at the hands of the few, or if the ethic were universal but held that property is jointly held in common (although Rothbard shows that this devolves into a non universal ethic in practice), the result would be the inability for anyone to act because his body is only owned by him to the miniscule amount of 1/(the population of the world) and he would need the remaining population’s permission to act…

Basically it boils down to the fact that taxation is theft. It is contrary to the free market and violates the only consistent political ethic. I highly recommend the above books. The Rothbard book is available in mp3 format on mises.org if you prefer that format.

P.S. Is there any way that Rothbard can be added to the spell checker for this site, or my browser if it is what controls the misspell underlining? I run firefox if that helps.

P.M.Lawrence,
workers are paid the equivalent of their discounted marginal revenue product. When taxes reduce the revenue to a firm, the wages of employees and ground rents absorb the tax. In the tax regime the workers are still paid the amount of their discounted marginal revenue product, It just is smaller than before the tax. When the tax is removed. The wages of workers and ground rents will increase. If they were not to increase, the employer would earn pure profit on the difference. This encourages other entrepreneurs to compete for this profit. The bidding action of the entrepreneurs quickly eliminates the pure profit, raises wages to the new discounted marginal revenue product, and leaves the entrepreneurs to make their normal income in interest. To suggest that the employers can develop and maintain a cartel in the absence of government intervention is preposterous.

By the way, the Pigovian tax assumes that entrepreneurs can pass the cost of the tax on to the consumer. This is not possible. If entrepreneurs were able to raise the prices of their goods, why did they not do it before the tax and reap the pure profit? No, the incedence of sales taxes is on the original factors, not on the consumer. Rothbard goes over this in Power and Market when he discusses binary intervention.

Stanley Pinchak writes “…The bidding action of the entrepreneurs quickly eliminates the pure profit, raises wages to the new discounted marginal revenue product, and leaves the entrepreneurs to make their normal income in interest. To suggest that the employers can develop and maintain a cartel in the absence of government intervention is preposterous.”

Of course it’s preposterous. Don’t make it up. Who ever suggested that? The thing is, there may well be yet other distortions – interventions, if you prefer – besides the direct ones, so simply removing the direct ones wouldn’t be enough.

He also writes “By the way, the Pigovian tax assumes that entrepreneurs can pass the cost of the tax on to the consumer”.

No, it doesn’t – and anyway, what is being discussed is a virtual Pigovian subsidy, not a tax.

He goes on “Furthermore, the concept of a Negative Payroll Tax makes absolutely no sense. For where are the funds for such a scheme to be had? Some other tax? Like a sales tax or capital gains tax? Both of these have their incidence on labor wages and ground rents.”

If he had bothered to follow up the reference, he would have found that the Kim Swales approach is self contained and does not require funding. That means that when he continues…

“So you would suggest that all taxes be placed on ground rents in practice? What will you do when this has the unintended consequence of removing marginal land from productive use and thus leads to the unemployment of many more workers? More taxes?”

…he is completely making it up. I mean, where does he get ground rents from, for instance? He is just reaching for his usual suspects.

P.M.Lawrence,
You read this econometric mumbo jumbo and believe that it will work as modelled? I bet it works about as well as full employment policies have for the national banks lately.

“Such subsidies improve, rather than impair, productive efficiency by offsetting market failures in other parts of the economy. They restore, rather than distort, appropriate price signals. They do not rob the private sector of resources but reallocate resources within that sector. As we have seen, such subsidies generate an expansion, not contraction, of private sector economic activity. Further if such subsidies can be packaged as tax rebates the possibility occurs of a simultaneous fall in taxation and increase in employment.”

Forgive me if I have doubts that further state intervention can correct prior state intervention. I have yet to see a case of this. Furthermore you can tell that these are the clothiers for the emperor when they speak of market failures. “Reallocation”, newspeak for robbing peter to pay paul, nice. Furthermore, their

“That is to say, the introduction of a new tax scheme would simultaneously increase employment and reduce taxation.”

I believe that this happens immediately after the fires of hell are iced over. Do you really mean to tell me that you believe in Kim Swales’ ability to make a reality of the neutral tax chimera. See Rothbard: Section 7 in the following link.

http://mises.org/rothbard/mes/chap16e.asp

“Indeed, in some simulations reported in Table 2 increased employment in low income groups occurs partly at the expense of lower employment and real wages for higher-wage sectors of the labour force. At the very least, policy makers should be aware of these possible distributional implications.”

Thanks Kim, no further comment.

Sorry – I should have written “it’s a tax break reducing a tax that is already there in the UK where Kim Swales is and in Australia where I am”.

Fundamentalist quotes me, “The approach suggested by Professor Kim Swales (see en.wikipedia.org/wiki/Kim_Swales) is in effect a Negative Payroll Tax working as a virtual Pigovian subsidy to lower marginal employment costs even more until all the distortions were offset; the marginal costs are what matter”, then comments “The problem with subsidies is where do you get the money to fund them? A subsidy is a payment from the state to a private company.”

That is a fair comment about an actual subsidy, apart from being too narrow about the recipients. That is why I prefer to describe the Swales approach as in effect a virtual subsidy, since it is self contained, needs no funding, and works by reducing tax burdens rather than supplying funds. That makes Fundamentalist’s next few sentences accurate about actual subsidies, but not to the point here.

Picking up after that, he goes on “All Swales’s plan would accomplish is transferring money from tax payers to subsidized workers, but only after the state had wasted half of it through administrative expenses”.

No. the whole point is, by cutting down the total tax take instead, it doesn’t go through that churning but rather goes direct from employer to employee without transfers. That is, Australian and UK unemployment benefits already do get channelled that way, from tax payers via government systems to the unemployed. This winds that back; it’s the unemployment benefit system along with the revenue base funding it that is the current market distortion, and the Swales approach is a Pigovian counter to it. Long term, of course, I would prefer a Coasian solution, but as it happens this one is fast acting and makes for a good transitional phase, eliminating one part of state intervention to be going on with.

Fundamentalist hasn’t picked up on what I pointed out about the average employee, that the average is of two very different sorts of employee, including CEOs etc.

Fundamentalist asserts that ‘Unless the state cuts spending, the tax reduction for the “virtual” subsidies will have to be made up by higher taxes on another group of people’.

Have another look at the mechanism. Here in Australia, GST (VAT by another name) is currently set at 10%. With the Swales approach, that percentage would go up, but the tax breaks would come in at the same time as well. My estimate for those would be a little over A$10,000 p.a. per full time employee and pro rata for others, to equal typical unemployment benefits plus marginal on costs. The total GST take would not go up or down the day it came in, but would fall as more and more of the unemployed were hired. I agree, with a GST as the carrying tax, at first some GST payers would pay more and others less, although later pretty much all would pay less. However, this is a feature of the carrying tax, and it would be simple enough to adjust for it by using different percentages for different industry sectors or using a different carrying tax. It’s probably not worth it, as we would be stuck with a varying rate system even after the transition to overall lower payments, which would be quite quick (months rather than years).

In Australia, a quirk of GST is that the federal level collects it but sends all the take to the states. I would really like to see the Swales approach implemented here without a percentage rise, so that the states would have to cut their spending. After all, the federal government only has a commitment not to keep any of it, not a commitment not to wind it back.

Any government that believes such subsidies will actually help anyone is socialist and will never cut spending.

Fundamentalist quotes me, “…the average is of two very different sorts of employee, including CEOs… In recent times the lower quintiles have not been earning more but facing stagnant or even falling incomes” (slightly rearranged for clarity), and comments “There are more than two groups and the majority of people are clustered in the middle… People at the top know how to take advantage of our socialist state and earn exceptional returns, while those at the bottom suffer. High taxes, regulation and inflation prevent businesses from investing in equipment that will increase labor productivity and wages. This a problem with our socialist policies, not with any aspect of the marketplace.”

I never said it was a problem with hypothetical free markets, I only said it was what was happening. However, that part about being clustered in the middle isn’t right. There is a graph referenced in the Art of the Possible post theartofthepossible.net/2008/07/21/when-you-see-a-turtle-sitting-on-a-fencepost illustrating “Virtually the entire increase in economic output over the past thirty years has gone to the rentier classes and to corporate management” at washingtonmonthly.com/archives/individual/2007_12/012733.php (based on afferentinput.blogspot.com/2007/12/if-america-had-100-and-100-people.html). That does show a basic separation into two main groups, showing that, as I said, “the lower quintiles have not been earning more but facing stagnant or even falling incomes”. I don’t think it’s that bad here in Australia, though.