What is seen and what is unseen: Government programs and stealth taxes
In listening to the Obama-Biden team on their tax policy, I have repeatedly heard the phrase, “no one who makes under $250,000 will see their taxes increase by one penny under our plan.†That may be so, but be careful: sometimes it is what you don’t see that gets you, like the car in your blind spot when you switch lanes. In graduate school one of my professors, Nobel laureate James Buchanan, constantly pointed out how many taxes remain unseen by those who pay them. Many times taxes are levied on sellers and then passed forward to buyers in price increases, seen as price increases, not as tax increases. In particular, Buchanan constantly fought against deficit financing and hidden taxation as what he referred to as “fiscal illusion,†where the ones who face the burden of the taxes do not notice they are actually footing the bill.
This is especially seen with taxes on corporations. The truth is corporations pay no taxes in the end. Taxes always and everywhere are paid by people. Corporate taxes are paid by customers in the form of higher prices, by workers in the form of lower pay, by vendors in the form of lower prices, and by shareholders in the form of lower share values and lower dividends. None of the burden falls on the corporation, itself, but rather on real people. Such taxes are stealth taxes as most people seldom see them coming.
Talk of taxing only the rich is similarly misleading. Here is what happens. If taxes are raised on the “rich,†fewer people go into fields where people get rich. That is likely to mean fewer doctors. With fewer doctors than we would have had at lower tax rates on the rich, the supply of doctors is decreased and doctors’ fees increase. If one can get another job which pays only slightly less after taxes without requiring going to school for so many years, and without enduring difficult study and years of poverty while in medical school, why make such a heavy investment in education when the return is so small. With fewer going into medical school, the before-tax pay of doctors goes up, leaving the after-tax pay of doctors practically unchanged. Similarly, more people go into fields that are paid less and have a fun side to them, such as bartending and rock-band roadie, so the supply goes up in roadies and bartenders and their before-tax pay goes down. Admittedly, such changes in the pay of doctors near the top of the pay scale, and bartenders and roadies at the bottom of the pay scale will take place over a decade or so. It is also something people will not notice that much, as pay for doctors goes up at a faster rate than pay increases for bartenders.
Not only are taxes that we call taxes always and everywhere a burden on real people, but alternatives to taxes also burden someone somewhere. The real alternative to taxation in funding programs is to run a deficit. And deficits are financed in two basic ways, by inflating the money supply (creating money through the Federal Reserve System) and by issuing government securities, which means borrowing. Inflation, by reducing the value of the dollar, taxes every dollar in everyone’s pocket, in everyone’s bank account. Borrowing, by using credit that could have gone to businesses that could have purchased equipment that would have increased worker productivity and worker pay, as well as profits for business owners, or to consumers for homes and automobiles by raising interest rates.
Professor Buchanan was particularly critical of an idea referred to as “the Ricardian equivilance theorem.†The Ricardian equivalence theorem is based on the work of an early 19th century economist, David Ricardo, who is better known for his comparative advantage theory of trade. Ricardo suggested that borrowing to pay for government spending or taxing people to pay for that spending are equivalent because people will have to pay for the borrowing through higher taxes (or lower government spending, that should benefit someone) in the future. The taxpayers could borrow the money themselves to pay for their taxes which would amount to the same level of borrowing as would occur if the government went ahead and borrowed it by running a deficit. Ricardo, contrary to the theorem that bears his name, goes on to discuss why people fail to realize that the future tax burdens from deficit spending are their own.
So here, with the fiscal illusion problem, the cost of any government-financed program is often not fully grasped by the voter-taxpayer. Thinking that someone else is really paying for the program, the voter-taxpayers choose to take on more public spending, more programs, than they would have if they fully realized the cost they bear. Hidden taxes, whether taxes that someone else is paying or deficit financing or inflation, lower apparent government costs and entice us to buy more government.
Fiscal illusion, what I call “stealth taxation,†deludes us to agreeing to government programs we would not have chosen if we knew their real costs to us. Whether it is government monopoly provided healthcare as Obama wants paid for by taxes on the rich, which are really taxes on us all, or deficit financing of a war that McCain may want, stealth taxation in any of its forms distorts reality the way too much beer distorts our own vision leading us to make various unwise decisions of the moment. Politicians always make sure we see how wonderful their spending plans are. But just as we have laws against drunk driving and that require corrected vision for those of use whose eyesight needs help, perhaps there should be fiscal choice rules, constitutional-level rules, requiring that fiscal choices be made only when we can fully see our costs.
-MC
March 5th, 2010 at 8:40 am
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