Study Guide to Man, Economy, and State with Power and Market

156 Study Guide to Man, Economy, and State with Power and Market
demanded. (A prime example is the unemployment due to the
minimum wage.)
Both taxation and government spending distort the economy;
the former drains resources away from the private sector
while the latter distorts resource allocation away from what it
otherwise would have been. There can be no such thing as a
neutral tax, because taxation is coercive and thus differs fundamentally
from a voluntary price. A so-called flat tax is not the
equivalent of a price, because in the market rich customers do
not pay in proportion to their income. A head tax would be
closer, but it too is coercive; some taxpayers would be forced to
fund certain government activities that they abhor.
It is a myth that taxes on a firm can be “passed on” to customers.
If firms could really do this—i.e., raise prices to generate
extra revenues to offset a new tax—then why didn’t the firms
do it before? It is true that a tax will eventually raise prices paid
by consumers, but this is achieved by lowering profitability and
hence supply, which then raises the equilibrium price.
Economists often try to gauge the “productive contribution”
of government activities by the size of its expenditures. Yet this
is directly opposite from the market approach, where value is
gauged by how much customers spend on products, not by how
much the business itself spends in making them!
In a credit expansion the government artificially lowers the
interest rate, thereby spurring investment in higher stages of
production. There is a temporary “boom” period of illusory
prosperity. With no genuine increase in saving, the capital
structure becomes unbalanced and eventually entrepreneurs
realize that their plans cannot be fulfilled. The “bust” ensues
when businesses discontinue the unprofitable lines and
resources must be reallocated to their proper uses.