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Sunday, February 24, 2013

The Economic Incidence of a Tax...

Is not the same as its legal incidence. The government can decree from whom a tax is collected, but not who will really pay it.

Let us say legislators place a special $5 million tax on any professional basketball player making over $25 million per year. This tax will fall solely on Kobe Bryant. But we can also imagine that Lakers fans have an intense desire to see Kobe play, and will pay much more to see the team with him playing than without him. Meanwhile, Kobe is on the verge of retirement, and says he will quit unless he can make roughly the same amount he made last year.

What we would expect in this case is that most of the tax will fall on Lakers fans and other workers in the organization. It might turn out the guy who cleans the team's towels takes a bigger hit (as a percentage of his income) than does Kobe. As Mises put it, "It is the operation of the market, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how they affect production and consumption." -- Human Action, p. 260

Both the left and the right ignore this all of the time.

2 comments:

  1. Both the left and the right ignore this all of the time.

    No we don't! We only ignore it when it hurts our policy position.

    ReplyDelete