Sunday, May 01, 2005

What is "free"? And what is "inflation"?

The only radio station I listen to is WABC (AM 770), a talk radio station based in New York City. Lately they've been playing advertisements talking about "free" radio, and that you should support the sponsors to keep radio free.

Apparently there are people who believe radio is "free" (and the same for broadcast TV). When you buy a 12-pack of Budweiser, a tube of Crest toothpaste, or buy a particular car, you don't think a portion of that is used by the company for advertisements, which of course pay for the radio station to stay in business? When companies pay the huge fees so a broadcasting station will show their commercials during the Super Bowl, where does the money ultimately come from? You may not pay a specific fee to listen to the radio or watch the evening news, but you still pay -- just indirectly.

The same principle, that ultimately the cost is borne by people and not by businesses, is why it's ludicrous to tax businesses at all. Socialists like the economically ignorant EPI like to claim that "corporations" ought to pay higher tax rates so that lower-income people can pay lower taxes. If a corporation pays a 50% tax rate versus 35%, who is naïve enough to think the corporation won't recover those costs by charging higher prices for its goods and services? Regardless of the official incidence, any tax is ultimately borne by people. Your personal tax rate might go down, but the PPI and CPI (the two measures of "inflation" most meaningful to consumers) will necessarily go up. Any "lower taxes" borne by individuals is merely an illusion.

Ah, some would counter, so what difference does it make anyway, if it's still people paying taxes? Indeed, there is a very important difference. As John Marshall said, "The power to tax is the power to destroy." The power to tax is the power to create disincentive. Which is worse, to discourage a corporation, or discourage people from working more? Or is there no difference in the end? Well, even if personal tax rates are sky high, people still have to work, and they will so long as there are jobs. But if your high corporate taxes discourage companies from establishing a presence in your jurisdiction, there won't be any jobs to begin with, no matter how low your personal tax rates are.

Additionally, a business must expend time and resources to pay taxes. If the tax burden were shifted purely to people, businesses would see a big cost drop, and people would have a negligible marginal cost when paying their taxes. The only cost increase would be because government had to calculate new tax tables, a mundane activity with a far lower cost than all the accountants and tax laywers that businesses hire. But what about the tax professionals thrown out of work? Well, Bastiat would say that it foolishly presupposes that that's the only thing they can do. They can go into other lines of work, as Bastiat said about soldiers of his time. Some of his contemporaries evidently believed it was necessary to tax people to keep soldiers employed, because otherwise what would the soldiers do?

I put inflation in quotes because it's important to distinguish between the two types. True inflation is caused strictly by a central bank's monetary policy, and it affects everything. If a central bank doubles the money supply over a period of time, then all prices (everything else being equal, particularly supply and demand) will have to double in that same time period. Then there are the Producer Price Index and Consumer Price Index, which, strictly speaking, do not measure true inflation. They measure increases in the cost of living, which includes "real" inflation along with supply and demand. They illustrate how life can become more expensive from increased prices of gasoline and other energy sources -- and also real estate values, workers' benefits, even corporate tax rates. But when "inflation" became part of the mainstream vocabulary, it took on the general (and improper) definition of the overall increase in prices. Today it's so accepted that even Federal Reserve governors will say "inflation" when they mean the increase in the total cost of living.

4 Comments:

Blogger Nicolaj said...

What's to say? What you're saying about corporate taxation is correct, in my view. But because corporations are people, per se, they make for much easier targets to tax. Politicians don't have to worry as much about the political backlash of raising taxes on corporations. It's why the US has one of the highest corporate tax rates in the world. Only Germany and a couple other welfare states tax corporates higher than we do. And they're decreasing those rates to try to reverse unemployment trends.

Sunday, May 01, 2005 11:54:00 PM  
Blogger Perry Eidelbus said...

All government and the socialists have to do is paint a corporation as a bunch of millionaire CEOs, and people will think the business can afford higher taxes. The reality, of course, is that everyone in a business will continue making the same wages.

Monday, May 02, 2005 12:20:00 AM  
Blogger Perry Eidelbus said...

By the way, Nick, do you recall that I've mentioned Larry Kudlow citing Ireland as a great example?

Ireland has a highly skilled, highly educated English-speaking people, but that wasn't enough. Once it slashed corporate taxes, suddenly all the major multi-national corps started establishing operations there.

Monday, May 02, 2005 12:22:00 AM  
Blogger Brad Warbiany said...

TANSTAAFL, Perry.

Monday, May 02, 2005 6:00:00 PM  

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