Tuesday, October 5, 2010

A tax on one is a tax on all

I've never had a formal economics class, but it's always seemed to me that there's no such thing as a "tax on the wealthy" or a "tax on the middle class" per se. In an economy, we're all connected. If you take money away from a rich man, he has less to spend on a fancy car, less to invest, less to use to expand his business, less to make a new product or hirer a new worker. All these activities involve transactions with others, and if the rich man is prevented from doing them, so are the others.

Similarly, if you take money away from a middle class man, he has less money to buy a new computer, go to a movie, take his wife out to dinner, or purchase a new car. Again, all these activities involve his entering into a mutually beneficial transaction with others. If he doesn't receive the benefit of those transactions, neither do others.

Put simply, a tax on one is a tax on all. Any time you suck money out of the economy, the economy slows down, and the burden gets passed on to everyone. If you lower taxes, on anyone, it permits and encourages more transactions, and the benefits are shared by everyone. As Mark Stein so aptly put it,
I don't need Barack Obama's help to 'spread the wealth around.' I spread my wealth around every time I hire somebody, expand my business, or just go to the general store and buy a quart of milk and loaf of bread.
This seems so obvious to me that I'm baffled why this concept of shared burdens and benefits doesn't come up constantly in our discussions of economics in general and tax policy in particular. I suspect part of the reason is that politicians have so much to gain by promoting hostility between different economic classes. Claim to be a champion of the middle class by blaming "greedy billionaires" and you get a lot of votes. Acknowledge that people "get ahead" not at the expense of others but by transacting with them in mutually beneficial ways and voters might actually require that you make substantive arguments in order to win their support. It's much easier to rally the troops for an "us against them" battle than for an "everybody wins" enterprise.

And so it goes.

Still, I have wondered whether my armchair economist analysis is too simplistic. Maybe I'd been missing something, and tax burdens aren't passed around to everyone. Maybe that's why this idea doesn't come up in economic discussions.

So I was pleased to learn today from Walter Williams [HT Betsy] that, not only is it the case that tax burdens and benefits are distributed, but that economists have a term for it:
There's a whole subject area in economics known as tax incidence — namely, who bears the burden of a tax? The first thing that should be recognized is that the burden of a tax is not necessarily borne by the party upon whom it is levied. That is, for example, if a sales tax is levied on gasoline retailers, they don't bear the full burden of the tax. Part of it is shifted to customers in the form of higher gasoline prices.

. . .

What about the politician who tells us that he's not going to raise taxes on the middle class; instead, he's going to raise corporate income taxes as means to get rich corporations to pay their rightful share of government? If a tax is levied on a corporation, and if it is to survive, it will have one of three responses, or some combination thereof. One response is to raise the price of its product, so who bears the burden? Another response is to lower dividends; again, who bears the burden? Yet another response is to lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of the tax.
So the good news is that I've been right, and I love it when I'm right.

The bad news is that politicians have as much to gain by stoking the class warfare fire as ever, so we're unlikely to hear them discussing economic policies in an accurate way -- within a "win-win" framework where everyone "gets ahead" -- any time soon.

But voters don't have to accept what is fed to them by politicians. And economics is not "rocket surgery." We're allowed to use a little common sense now and then and figure out that rich, poor, and middle class people all benefit each other. We don't lift ourselves up by tearing others down; we improve our lives by trading something we have -- be it money, time, a product, or a service -- for something we want more. The person we are trading with does the same, and in this way everyone gains. We all grow wealthier.

And it doesn't take politicians or government to make it happen.

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