Economic Facts & Fallacies

 

1. PROVING THE CLAIM

TAXES REDUCE INCENTIVES

1. The primary incentive to do X is money.
2. If the amount of money increases then the incentive increases.
3. If the amount of money is decreased then the incentive decreases.
4. Therefore the amount of money offered corresponds to the incentive.

Example in practice

Imagine I offer you $100 to mow my lawn. You mow my lawn. Imagine I offer you $200 the next day to mow my lawn. Would your incentive to mow my lawn increase? Would you be willing to sacrifice more perhaps? (Not go to the movies for example). Imagine I offer you $20. Would your incentive to mow my lawn decrease?

This seems like a trivial and almost obvious point. The answer to all those questions is yes. In a way it's simply describing supply and demand. Of course if all things obviously true were believed, I would not need to write such things as this.

If you accept the premises above and answered yes to the questions in the thought experiment, then it's fair to say that we've established the amount of money offered corresponds to the incentive to do X.

Tax - A charge against a citizen's person or property or activity for the support of government.

A tax basically is forced 'fee' or 'charge' on something. If I were to pay a 50% tax on $100, I would be left with $50. Taxation therefore reduces the value of whatever is being taxed.

Example in practice

Imagine I offer you $100 to mow my lawn. You mow my lawn. Now imagine I offer you $100 to mow my lawn, and the government recently imposed a tax on mowing lawns, the tax is set to 50%. I offer you $100, but you only receive $50. Would you incentive to mow my lawn change?

Again, all of this is quite obvious. The answer is yes. Economically, there's no difference to you whether or not he offers you $100 or $200, what you will actually receive matters. By the same reasoning, economically it makes no difference to the man how much you get, what he actually pays matters.

If you accept the premises above and answered yes to the questions in the thought experiment, then it's fair to say that we've established if the amount of money offered corresponds to the incentive to do X, and if taxation results in the amount of money being offered always being lower, then it's reasonable to conclude that taxes always reduce the incentive to do X.

In summery

5. The primary incentive to do X is money.
6. If the amount of money increases then the incentive increases.
7. If the amount of money is decreased then the incentive decreases.
8. A tax always reduces the amount of money offered to do X
9. Therefore taxes always reduce the incentive to do X


The implication of this simple principle is that when someone offers to tax a good or service, he is by consequence reducing people's incentive to do that service or consume that good.

When all of this is realized, it becomes very interesting to consider how our tax system is levied. Here are some commonly held ideas

1. Tax the "rich"
2. Tax businesses that employ people.
3. Tax large oil companies with windfall profits tax (95% tax after a set amount)
4. Tax capital gains (investment)
5. Tax death

What's even more bizzar is many are in favor of having very high taxes on corporations, and very wealthy people and families. Barack Obama for example is in favor of taxes as high as 39% on individuals making $200k or more, and a family making $250k or more. Now I think it's reasonable to say that in general those who are earning such a high amount are the most productive in the sense that their services or labor is in such high demand. It's also reasonable to assume that in general those who earn such a high amount are the most responsible for employing people. Given those facts it seems odd to reduce people's incentive to remaining productive in the same ways.

Consider Obama's desire to raise the capital gains tax. Obama's was asked about this during a democratic presidential debate with Hillary Clinton.

GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent.
But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.

OBAMA: Right.
GIBSON: And George Bush has taken it down to 15 percent.
OBAMA: Right.
GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.
So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?
OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness.

Obama has since considered lowering that figure to 20%, probably due all of the heat he's received from it. In either case, when we consider the principles being discussed this idea seems counter productive. From what I understand, capital gains are gains earned from when a stock is sold. The result of the tax will be a decrease in the incentive to invest, or at the very least invest in risky stocks (stocks of those who are probably just starting out).

2. REFUTING THE CLAIM "CHEAP LABOR HURTS THE US"
Technology Analogy

Imagine there's a manufacturer of toothpaste who currently has 100 people working for him manually putting together the paste & tubes they go into. His current rate of production is say 5,000 tubes of toothpaste a day, his production costs per tube is $10, and he sells them for $15.


Thousands of people every month buy his toothpaste.
Now imagine this man meets an engineer and they discuss business. The engineer talks about inventing a machine that may assist him in his toothpaste business.


Time goes by and the machine is finished. This manufacturer can now produce 50,000 tubes a day at the cost of $1 per tube. Not only does this equate to 10x the amount of production at 1/10th the cost, but the machine can easily be maintained with 10 people.


The manufacturer lays off all 90 of the least productive or needed employees and begins training the remaining 10 how to use the machine and then doubles their pay.

He now can not only provide 10x the amount of toothpaste but now sells it at $2, saving it's customers on average $300 a year.


Is this a good or bad thing? This in summary is the essence of technology. Technology allows human beings to do more things at lower costs. This is undoubtedly a good thing, and could even be said to be the best thing that could ever happen to humanity since it allows us to produce more of what we want and need with less work.


Now let's say this machine was in a different state from the manufacturer. Is this bad? Let's say the machine was in another country. Is it any less good? Now let's say it's not a machine but 1000 workers. Is it now bad?


To those who would say that free trade harms the US or the other country economically is now in a very absurd position, since economically speaking there's no difference between a machine & a person, if the costs and production speed are the same, and there's obviously no logical reason why the distance between the machine and the manufacturer would make this any less good, yet this is exactly what free trade opponents are saying.


It is undoubtedly true that 90 people lost their jobs. Many people who were in the horse & buggy industry lost their jobs when the automobile became less expensive and more people exploited its benefits. Many in the type writer industry lost their jobs with the advent of the personal computer. Yet, all of these changes are good things that have increased the standard of living for everyone.
3. REFUTING THE CLAIM
"NON-MONETARY TRADE DOES NOT INVOLVE PROFIT"

Non-monetary profit

When defending economic freedom, or as some call capitalism, I'm often confronted with the notion that non-monetary trades are not "for profit" but are done because the trade is "fair" or "more fair" then a trade or transaction done for profit.

For example, in discussion with a member of the Socialist Labor Party‎ a part of the conversation on profit, trade, and labor went something like this.

Socialist: The capitalist employer steals the 'true' value of a workers labor by profit. A worker's labor may produce 10 chairs a day but his wage can only buy him 4 chairs. Therefore the workers true labor is 'really' 10 chairs. The capitalist is therefore stealing his real labor for profit.

Me: Of course, if the employer paid the man more or equal to the amount of output there'd be no incentive to hire him. If a worker makes a business $1,000 richer by increasing production, you're not going to pay him $1,500. (I then blabbed about supply & demand etc)

All right, what about if I trade you 2 chairs for your table, and there is no money involved, is that wrong?

Socialist: No. There is no profit involved.

This idea is brought up in many different forms. The idea that a trade, if done with goods or services alone is not for "profit"

The concept of profit of course is the idea that you gain more than you invested, or the idea that you receive/benefit more than you put in. In monetary terms this is when you buy a good at $1 and sell it for $1.50, making a 50cent profit. Of course, we also speak of profit in terms of gaining in any sense. You could say that many profit from education, since what they get from an education is valued far greater than what was lost receiving it – time & energy.

Let's take the case of the man who trades two chairs for one table. This is claimed to be a 'fair' trade not for profit. Why would anyone trade two chairs for a table? The man obviously values the table more than his chairs, and the man must also value the chairs more than his table. Here we have a situation where the objects have a value relative to each man. In each case the value of the good desired is higher than the good being traded for.

Value is not an objective property but rather something that depends on the existence of minds to desire things. Oil has much more value than dog poop, and the reason has nothing to do with the essence of oil but the fact that it has a much higher demand for it – compared to dog poop. Imagine if tomorrow they discover that dog poop can be converted into something your car can run on – the value of dog poop would change. Its change is directly linked to its demand, which is the word used to described how much something is desired. So any notions of "real" value or "objective" value are false and based on a false concept of value. The term "real" value or "objective" value – in the sense that things have value independent minds/desires – is used time and time again in the discussions of economics, often by those trying to argue that profit or capitalism only works if people are suckered into buying something for more than its "real value." Those who argue this simply are clinging to false and emotionally driven intuitions about the concept of value, and simply have not thought it through.

When this trade occurs, the result is that both men are now in possession of something that was deemed more valuable to them. Both men gained more than they lost – they profited. In the same way that someone makes a monetary profit by receiving more money than they put out.
By: David Campbell
Originally written: Monday, September 15, 2008