The Ludwig von Mises Institute

Radio host Mark Levin, who positions himself as a conservative, went on a tear last week, in particular going after Murray Rothbard (whose criticisms of Ronald Reagan Levin cannot abide). I’ve responded:

We’re wrapping up our discussion of international trade in Econ 100 today with an analysis of tariffs and import restrictions. The defense of protectionism is a classic example of the Broken Window Fallacy in action.

Suppose the government decides to impose restrictions of some kind on automobiles produced in Japan. To the untrained eye, this looks like a great idea. More Americans are employed making cars, and they earn higher incomes. Detroit booms. It’s easy to see autoworkers’ nice cars and nice houses and conclude that protectionism is a great idea.

But there’s more to this than meets the eye. What we don’t see are the hidden costs of protectionism. The first is the waste from using costly production methods. Protectionism changes manufacturers’ incentives, and they use capital and labor that could have been better-used elsewhere to produce (say) cars. The economic imagination is useful here. If people weren’t making cars, they could be making medical devices. Or tacos. Or automotive repair services (it stands to reason that if you can build cars, you can probably also fix them). Or any of a number of other things. As Russell Roberts points out in The Choice, there might be some short-run costs for workers who have trouble retooling; however, free trade leads to new opportunities for the next generation.

The second cost comes from the fact that tariffs increase the price of cars. When prices rise, people demand less of something. Consumers are worse off because they have fewer cars, and the cars they are no longer buying are cars that would cost less than consumers are willing to pay in the absence of tariffs. Interventions like tariffs raise the incomes of some workers by impoverishing others.

The third cost comes from the change in incentives when it is discovered that people can raise their incomes by getting favors from the government. At best, favors from the government are a zero-sum transfer from one group of people to another. In reality, however, people use scarce resources to effect these transfers. Consider just one cost: the cost of flying to and from Washington, DC. The plane that is flying auto executives and union representatives from Detroit to DC could be used for something else, like flying people from Detroit to New York for business or from Detroit to Los Angeles for a vacation. The prospect of subsidies, tariffs, and other benefits from the government means that people will take valuable resources that could have been used to create wealth (planes, the time and energy of flight attendants and pilots, bags of roasted peanuts) and instead use them to transfer wealth. On net, we’re all worse off.

On Political Incentives and Subsidies:

On the Broken Window Fallacy:

*Interested readers might be wish to read The Choice by Russell Roberts. In it, a television manufacturer is visited by the ghost of David Ricardo. Hilarity ensues, and the case for free trade is explained beautifully. The link is to my Amazon Associates Account; any revenue I get from Amazon Associates sales will go to the Fellowship Memphis “Engage Memphis” fund:

I’m working on a couple of chapters for a volume on institutions and economic growth in Tennessee, and I was wondering if anyone in the Mises network knows much about the influence of religious organizations on prohibitions of sex, drugs, alcohol, and different activities in Tennessee specifically. If so, please leave a comment below or email me (art-dot-carden-at-gmail-dot-com).

In America the population is collectively on edge at tax time because 140 million people file tax returns out of a total population of 310 million. Of course not everyone who files, pays taxes, but at least all these folks share in the annoyance at filling out (or paying someone else to) the ever-changing, mind-bogglingly complex, 1040 form.

Here in South Africa, I learn that the South African Revenue Service just announced that there has been a 13.8 percent increase in the number of tax returns filed. A record of just over four million tax returns were filed, up considerably from just over 3.5 million in 2010.

South Africa’s total population is well over 50 million. So less than 10 percent of SA’s population is paying for the other 90 percent. But of course, individual taxpayers only cover 35 percent of the government’s budget, while 45 percent comes from the VAT (value added tax) and corporate taxes.

On the other hand, the five million taxpayers likely pay most of the VAT and as Business Times columnist Stephen Mulholland points out, “the more prosperous among the five million also relieve the state of the burden of health costs, education for their children and, in many cases security in their homes.”

The last place you want to go for health care is a government hospital, I’m told, and the walls around the home where I’m staying in Johannesburg are a good 10 feet high, with electric wire at the top. The neighbors have a generator anticipating the frequent power outages.

Roughly one million people work for the South African government, so after those people are netted out, it is really four million people paying for a South African government that spends 50 percent of its budget paying its one million workers. And, while public workers have enjoyed wage increases, SA’s infrastructure crumbles, as little is budgeted for providing the services government insists on providing.

Living in South Africa means learning to live with sporadic brown outs, despite rate hikes of 25 percent each of the last three years. In every city we have visited, the power has gone off for extended periods of time, making it especially uncomfortable, for instance, in sweltering Durban.

But while our hostess is extremely annoyed at her government’s ineptness at keeping the lights on, there just aren’t enough taxpayers like her in this democracy to carry any weight.

Last week, the Heritage Foundation published commentary on the number of Americans who pay income tax, and decried the fact that 49.5 percent of Americans are “not represented on a taxable return.” The Daily Mail then picked up the statistics and announced that “HALF of Americans don’t pay income tax despite crippling government debt.”

To its credit, the body of the Heritage post began with a reference to the “the sharp increase of Americans who rely on the federal government for housing, food, income, student aid or other assistance.” The emphasis of the piece, however, and thus, the emphasis of the other news outlets and pundits who have picked up on the statistic, is that too few people pay taxes.

The increase in reliance on government assistance is the problem here, not a lack of people who pay income tax.

Yet, it has become something of a right-wing talking point to claim that a declining number of taxpayers among some income groups is a nefarious development in American history.

The emphasis on the lack of taxpayers is getting the whole issue backward. The problem is the increase of income from government transfer payments. There is nothing bad whatsoever about fewer people paying income taxes.

The Conservative obsession with getting people to pay more in taxes comes from a preoccupation with class warfare in which it is assumed that if middle-class and wealthy people are paying too much in taxes (which they are), then the solution is to punish low-income people by making them pay more in taxes. It’s allegedly not “fair” if everyone is not being extorted by the state in a similar fashion.

The just solution, however, is to greatly decrease the tax burden of those paying taxes now. In a recent NPR interview, Ron Paul nicely summed up what is actually “fair”:

MR. SIEGEL: This week’s release of Mitt Romney’s taxes and President Obama’s advocacy of a millionaire’s tax raise questions about fairness in funding the government. The first question: Do you believe that income derived from dividends interest or capital gains should be taxed at a lower rate than income earned from a salary or commissions?

REP. PAUL: Well, I’d like to have everybody taxed at the same rate, and of course, my goal is to get as close to zero as possible, because there was a time in our history when we didn’t have income taxes. But when government takes it upon themselves to do so much, you have to have a tax code. But if you’re going to be the policemen of the world and run all these wars, you have to have a tax code. But as far as what the rates should be, I think it should be as low as possible for – for everybody.

It’s a safe bet that Siegel’s underlying assumption behind the question is that in order to make taxes fair, then anyone who is paying a tax bill that is too “low” should therefore have his taxes raised.

The opposite is true, as noted by Paul.

So, when Conservatives get bent out of shape about some people not paying tax, the response should be to demand lower taxes for everyone, not to complain that people aren’t paying their “fair share,” which seems to be the Conservative sentiment.

We might also note that this statistic apparently only applies to income taxes. It says nothing about payroll taxes, which for many middle-class people is by far the largest part of one’s monthly tax bill. Any teenager with his first job notices just how much those payroll taxes take out of one’s paycheck. So, to claim that people aren’t paying taxes simply because they’re not paying income tax is rather disingenuous. Since there’s no such thing as a Social Security or Medicare trust fund, payroll taxes are really just income taxes under another name.

Also, any demand for more taxation is really just a demand for increased government revenue. It’s a call for more money so government can bomb more people, bail out more banks and spread around more largesse to politically well-connected friends.

So, the focus on whether or not “enough” people are paying taxes completely misses the point. The larger point is that far too many Americans receive government benefits. Indeed, recent increases in income as measured by the BLS, reflect increases in government transfer payments, as I’ve shown here.

Ludwig von Mises wrote in Bureaucracy that a system in which a majority of the population is dependent on the government dole leads to an unstable political and economic situation, since a majority of the population then has a vested interest in increasing the power of government to redistribute wealth. While the Heritage article makes some comments in this vein, it nevertheless makes the claim that “The rapid growth of Americans who don’t pay income taxes is particularly alarming for the fate of the American form of government.” Really? By that logic, “the American form of government” would be in danger if the income tax were abolished. Oh, how did America ever survive prior to the 16th Amendment?

There is no doubt that the growth in dependency on government largesse is a serious problem, but that doesn’t mean that any American pays too little in taxes. It simply means that the government spends too much money.

The Conservative reaction to this statistic, however, seem to be: “Hey, those guys aren’t being taxed! Tax them!” This is hardly a phrase that should be uttered by anyone who claims to be for limited government.

LvMI scholar Jorg Guido Hulsmann has a paper entitled, “General Overview of the Magnitude of the Crisis: A Comment”, in the academic journal of  The Pontifical Academy of Social Sciences.  Scroll down to page 95.

The new issue of the Journal of Economics and Financial Education is now available online and it is a special issue devoted to a symposium on teaching Austrian economics (Vol. 10, No. 2, Fall 2011).