Saturday, November 15, 2014

Repeat after me: the government has no control over who pays taxes

Kevin Drum makes a common error:

"Does it matter that the working class barely pays for most of these programs in the first place, since their federal income taxes tend to be pretty low?"

The government can control from whom it collects taxes. It cannot control who pays them. That is determined on the market. As Caplan puts it, "Tax incidence depends on supply and demand elasticity, not legislative intent."

To take a simple example: Imagine you are a billionaire with a large domestic staff. You want to trust them, so you pay them a wage above the prevailing one. You're planning on giving them all large Christmas bonuses, when you read that a new tax law aimed at high CEO pay is going to cost you $50,000 this year. That happens to be the exact amount you were going to give out in Christmas bonuses, and so you decide simply to skip the bonuses this year.

The government purportedly aimed to tax high-wage CEOs, but in this particular instance, the entirety of the tax burden actually fell on low-wage domestic workers.

Or perhaps it did not even stop there: Perhaps your servants would have given their Christmas bonuses, if they had received them, to homeless shelters around the city. If that had been the case, the burden of the tax actually winds up falling on the homeless!

One consequence of understanding this is that one realizes our current, Byzantine tax code is absurd, and benefits no one but H&R Block and its ilk. Whatever level of resources the government is going to extract from the economy, it should be done with a minimum of fuss and bother. That is why I favor taxing land: you can't really hide it, so tax evasion and all the resources devoted to detecting tax evasion, disappear. And taxing this way would not pick on landowners, since the actual burden of the tax will get passed on by the market to wherever it winds up getting passed on to.


  1. I wouldn't say that that's determined by the market. I'd say it's determined by people's circumstances, ability to pay, etc.

  2. I'm actually against property taxes, or taxes on static wealth as I call them, because they have the potential to make someone's worth dwindle without any activity on their part. I'm much more in favor of sales taxes and transaction taxes.

    1. Samson, The point of this post was the legal incidence of taxes are different from their economic incidence. But your comment here implies that they are the same.

    2. That there is a difference between what one is required to pay and what one actually ends up being able to pay? Of course. I'd be a simpleton for denying that there is a difference between the two, but…I'm not sure how to put this next part into words, so I may end up saying something either incredibly stupid or incredibly obvious. The tax is what they're required to pay and I think that is what makes a difference. I don't think taxes should be burdensome and a tax on owning something seems like one of those because it's not one and done like a tax on a sale.

      Before you think that this is me arguing that a property tax is a negation of ownership, I want to to say that that is not what I'm arguing. My reason for rejecting property taxes is that, barring search warrants, jury summons, and new construction codes, they can never choose to quietly withdraw from society. I formulated this before I was ever introduced to libertarianism.

  3. Isn't "the market" just our shorthand for the sum of all those things?

    1. I wouldn't think so, unless "market" means "non-government".

  4. An important point. Landsburg bangs this can, but convinces few readers (alas). Actually I think this is a good argument for taxing consumption.
    In the long run you might be right about just taxing land, but in the interim there would be more dislocations and arbitrary shifts of market power.
    Of course, the homsteaders will freak ...

  5. Hi Gene,

    I apologize if this becomes a duplicate post. I think I had trouble submitting my first comment.

    One concern I have with the idea of taxing land is the risk of people who outright own their land subsequently being dispossessed of it. This is one of the reasons I have detested property taxes, since to me it seems akin to paying rent to the local government for a parcel of land and a home which I already own. If I fail to make rent, I can lose that which I already purchased. To my simple mind, a tax like that seems to antagonize the idea that I actually own my property. This is especially a concern to me for the elderly, who might be on a fixed income. The thought that a property which has been in a family for generations might be lost through a mechanism like this bothers me.

    By the way, I am not a libertarian, and I do not view all forms of taxation as automatically equivalent to theft.


    1. That is exactly my concern, too!

    2. The government has to have some point of tax collection. If it is known and established that the taxes on land, then the price of land would just to take that into account. This is an argument for gradually shifting taxes to land, and a good one, but not an argument against such a tax.

    3. "The government has to have some point of tax collection."

      Could you explain what you mean by this?

      "This is an argument for gradually shifting taxes to land, and a good one, but not an argument against such a tax."

      How so?

    4. 1) Taxes have to be collected somewhere.

      2) as long as there is time to adjust, the market will adjust the prices of whatever .8 taxes collected from to distribute it across the economy. So if attacked Sunland is established gradually, land prices will go down to reflect the price of that tax.

    5. Sorry, I hope you can decipher Siri's version of my reply.

    6. "Taxes have to be collected somewhere."

      I think you meant "from somewhere", here. I understand that, but there are many possible sources that can be used. Income taxes and sales taxes, for instance.

      "Sorry, I hope you can decipher Siri's version of my reply."

      I'm trying, but it's difficult. You seem to be saying that the price of the land will adjust to handle it. That doesn't exactly factor into my argument, though (maybe it does and I don't realize it). I disagree with David that a property tax negates or "lessens" ownership of the land, but I'm uncomfortable with requiring people to pay to continue to keep something (licenses are different) because it whittles it away over time, unlike an income tax or a sales tax.

    7. 1) The whole point of the original post is that it doesn't matyer where you collect the tax.

      2) If it is known that land is where the tax is collected, the price you pay for the land will be lower. All taxes are distributed across the economy by the market: it doesn't matter where you collect it.

    8. "The whole point of the original post is that it doesn't matyer where you collect the tax."


      "If it is known that land is where the tax is collected, the price you pay for the land will be lower. All taxes are distributed across the economy by the market: it doesn't matter where you collect it."

      I still don't think this addresses my reasons for opposing property taxation. You pay for the land once when you buy it. You pay a tax on a transaction (i.e., income, sales, etc.) once when you make that transaction. You pay the tax on the property year after year.

    9. So what? What does it matter if you pay $400,000 for a piece of untaxed land, or $300,000 for that land, and then a future series of tax payments who's present value is $100,000?


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