The Middle Class Pays

Taxes. Who pays how much?

There’s been much discussion about big government as a tool to provide for the poor at the expense of the rich “who can easily afford it.”

However, economists know that the location of the suffering is not necessarily at the point of application of taxes.

The cost of big government and the allocation of taxes is actually quite difficult to account for because of the interactions with supply and demand and the transactions in the economy.

Raising tax rates does not necessarily give higher tax revenues. In fact the opposite seems to be true for most taxes. Historically and logically, tax rate decreases have resulted in higher tax revenues. This paradox can be explained by the human reaction in attempts to avoid the burden of taxation. John Maynard Keynes said “tax avoidance is the most lucrative economic activity.” In fact, when more knowledgeable people  are faced with a higher tax rates they can take several different approaches to reducing their tax liabilities.

One. You can hire more lawyers and accountants and do nonproductive churning to move revenues into lower tax channels. Most of this activity is nonproductive churning as it relates in a change from what the consumer normally demands through the pricing structure.

Two. Activities which are subject to higher tax rates can be moved to a different location or a different country where tax rates are lower.

Three. People who are taxed can decide to simply not do something because they don’t get enough benefit from it after tax– or taxable activity is driven underground and there is a black market or a barter market with no cash exchange that could be a basis for the taxation.

Four. Wealthier more economically active people can simply shift the burden of the taxation to their customers by raising prices or reducing the size of packages and so forth. This results in generally higher prices which some people think of as “inflation.”  The customer pays more and gets less.

Thus, as Ludwig von Mises observed, “the market, not the government, determines who will bear the burden of taxation.”

Moreover, those who advocate taxing of “rich” corporations fail to realize that companies don’t pay taxes; people pay taxes. The corporation is merely a channel through which government extracts a toll from the consumers.

Five. Churning distorts and suppresses productive activities that would better be incented by customer preferences through the pricing mechanism. Government forces activity that people don’t really want to do– otherwise they’d be doing it. Government also preempts and discourages productive private enterprises such as private charity. When the government gets into something the innovators get out.

Six. Costs of a big government include:

A. Direct taxes which can be shifted by raising prices and legal/accounting maneuvers. he middle class pays.

B. inflation. Meaning expanding the money supply to pay for things that people want for free without the politically unpopular mechanism of paying for it through taxation. Now of course increasing the money supply results in a lower value of the money in a lower purchasing power. This is actually the definition of “inflation.” The middle class oays.

C. Aside from the effects of taxation that are shifted through prices and inflation that results from expanded money supply government disruption such as through tax policy distortions and regulations are often well-meaning, also result in higher costs of production that must be borne by somebody and of course the consumer inevitably pays. Because companies don’t pay taxes people pay taxes.The middle class pays.

A prime example of this is in Obamacare which, as it is implemented, results in all kinds of severe disruption of the healthcare industry including an increase in the costs of care, paperwork, delays in service, inefficient provision of private insurance, which is now raising the cost of private insurance. The middle class pays.

One would think that health care is too important an activity to be put into the hands of government.

Through all its spending on “stimulus” whether it be financed by taxation, expansion of the money supply (quantitative easing) laws that force people to do things in ways that they don’t want to do them, mandating products that nobody wants to buy. Government does not “create new jobs”. Quite the reverse. Due to this interference and disruption, private investors are fearful of taking risks when they don’t know what the government is going to do next. So private investors who would have created jobs are reticent to pursue new ventures. The private sector creates jobs, the public sector creates work.
The middle class pays.

At the end of it all, we are left to conclude, “that politicians are like cockroaches, it’s not so much what they pick up and carry off, it’s what they fall into and mess up.”

The solution is to restrict governments to their proper functions, maintaining the rules, so individuals can produce, sell, consume, and pursue happiness without interference by fraud and violence and threats from other citizens–or from the government.



Posted by at October 11, 2012
Filed in category: Uncategorized,

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