Look how much they took out in taxes!

People voice this complaint about their paychecks from time to time.

It is silly, because:

1) In the absence of the government your taxes pay for, your salary would be... well, you have no idea! If libertarian anarchists are right, it would be much higher. But what if communists anarchists take over? Your salary, if it is high, might be much lower. Or maybe social democrats are right, and we already have the perfect sized government that happens to be maximizing your salary already...?

2) But, much more importantly, you have no idea how much you are paying in taxes right now.

What?!

Well, let's hear from Ludwig von Mises: "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, Scholar's Edition, p. 260).

This is very important and I think the full consequences of this are rarely thought through, but it means that, while the government may be able to collect from your paycheck, say, $500,000 per year, the government cannot control who is actually paying that tax. While it is collected from you, depending upon the shape of the supply and demand curves of all parties connected to the decision to hire you, the tax will be paid, in some proportion, by you, your employer, your employer's customers, your employer's suppliers, and anyone else who trades with any of those parties.

So, for instance, if you have a vertical supply curve for your services, at least in the part of the curve relevant here, so that you will supply no labor at all for less than $500,000 per year (say, you have lots of money saved, and want to write your memoirs), while your employer has a horizontal demand curve for your services (because you are a superstar consultant who brings in millions, and again, we only need posit horizontal over a range), then if the government taxes "you" at a 50% rate, your employer will just bid $1,000,000 for your services, absorbing the full impact of the tax themself.

But if their customers have (near) vertical demand curves, then your employer can pass on (most) of the tax burden to them. And so on.

Therefore, if there be, &c.      Q.E.D.


Comments

  1. If the government increases income tax by 10% to enhance the salaries of government officials it would be silly to complain because:

    - This higher level of tax may actually be the optimum rate for all we know
    and
    - The full burden of the tax would probably not be borne by income tax payers.

    I'm not totally convinced that Mises would be on board with this analysis.

    ReplyDelete
    Replies
    1. rob, you are an idiot.

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    2. And the reason I say that, with the deepest affection, is that my post says *nothing* about whether or not the total tax burden on society is too high. (Which, by the way, I think it is... way too high.) My post just says we can't tell who the tax burden is falling upon... an analysis that I *learned* from Mises, so yeah, he'd be "on board" with it.

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    3. But your post doesn't 'just say we can't tell who the tax burden is falling upon'. Its says that this fact (plus the fact that we don't know what the optimal tax level for salary maximization is) means that it is silly to complain about taxes being too high (which is what I assume people mean when they exclaim 'Look how much they took out in taxes!', the phrase you deem to be silly) .

      Delete
    4. rob, point me too which line in my post says, "Don't complain about taxes being too high."

      And please, when doing so recall that *I* think taxes are too high, and will gladly complain about that.

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    5. - Your post is titled 'Look how much they took out in taxes!'.
      - The first sentence is 'People voice this complaint about their paychecks from time to time. It is silly...".

      A reasonable (but apparently incorrect ) interpretation of this is that you saying that people who complain about the income tax they pay being too high are doing something silly.



      Delete
    6. Yes, that is exactly what I meant! Because, if you understand Mises, you will realize that you have no idea how much tax *you* are paying.
      But you interpreted it to say that I could not possibly think the overall tax take is too high!
      As Mises notes, you really have no idea how much *you* are paying in taxes. The government can only dictate where taxes are collected, not who pays them.

      Delete

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