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

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Chapter 4: Binary Intervention: Taxation 205 Chapter Outline 1. Introduction: Government Revenues and Expenditures Government derives its revenue (income) from taxation and inflation. This chapter assumes that all revenue is spent. 2. The Burdens and Benefits of Taxation and Expenditures Society is composed of taxpayers and tax consumers. The tax consumers (politicians, bureaucrats, and subsidized citizens) benefit from taxation while the taxpayers foot the bill, though the exact effects are difficult to trace. All government spending is consumption (not investment). All taxation distorts resource allocation and severs “distribution” from production (whereas there is no such distinction in a market). The total level of taxation is far more significant than the specific forms of the tax. 3. The Incidence and Effects of Taxation Part I: Taxes on Incomes A. The General Sales Tax and the Laws of Incidence Tax incidence refers to the actual long-run burden of taxation, which may differ from the immediate target. Contrary to popular and even mainstream economics belief, no tax can be shifted forward. Even in the “obvious” case of a general sales tax, it is not true that the retailers can “pass on” the tax in the form of higher prices. (If they had this power, why wait for the tax?) They stay in business by shifting the tax backward to the factor owners. Thus all sales taxes are ultimately income taxes.
206 Study Guide to Man, Economy, and State with Power and Market B. Partial Excise Taxes; Other Production Taxes An excise tax distorts resource allocation (as all taxes do) by shifting demand from consumers to politicians, but also because it only applies to particular goods. Excise taxes too are ultimately taxes on income, not just consumption. C. General Effects of Income Taxation Because sales and other taxes are ultimately taxes on income, this section is not confined to the “official” income tax. An income tax naturally reduces the utility of the taxpayers, and generally provides a disincentive to earn income. (Even if someone ends up working greater hours to offset the tax, this still represents a loss of utility.) Income taxes may indirectly raise time preference rates by reducing overall income. They also encourage unofficial work, e.g., “do it yourself” projects, and hence impair the division of labor. Contrary to many “right wing” economists, it is no more odious to impair savings than consumption. D. Particular Forms of Income Taxation (1) Taxes on Wages Taxes on wages cannot be shifted to the employer. In fact, the opposite is true. The employer contribution for Social Security is ultimately deducted from the employee’s wage. (2) Corporate Income Taxation Corporate taxes are examples of “double” taxation. This encourages stockholders to leave
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STUDY GUIDE TO MAN, ECONOMY, AND ST
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CONTENTS INTRODUCTION . . . . . . .
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In June of 2004, I became convinced
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Introduction ix appropriate, I have
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Chapter Summary In a money economy,
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Chapter 4: Prices and Consumption 4
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Chapter Summary In the evenly rotat
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Chapter 6: Production: The Rate of
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Chapter Summary This chapter explai
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Chapter 7: Production: General Pric
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Chapter Summary Entrepreneurial pro
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Chapter 8: Production: Entrepreneur
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Chapter Summary Consumer preference
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Chapter 10: Monopoly and Competitio
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Chapter Summary Like all goods, the
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Chapter 11: Money and Its Purchasin
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Page 262 and 263: Index 251 Equilibrium, 47, 104 macr
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Index 255 See also Economy, Evenly
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