Wednesday, December 25, 2013

The “Small” Solution to a Big Tax Problem

By Marc Faber

If the government levies taxes on landowners, retailers, corporations, and individuals, it is far from certain that the targeted interest groups will actually pay the tax. Depending on a variety of factors, they may be able to roll over or shift the tax to other people (tenants, consumers, workers, etc.) either partly or entirely. As Alfred Marshall said: “There is scarcely any economic principle which cannot be aptly illustrated by a discussion of the shifting of the effects of some taxes.”

The Swedish Nobel Laureate, economist, sociologist, and politician Karl Gunmar Myrdal also contended that the results of taxes can “diverge greatly” from the intentions. (All government interventions in free markets lead to unintended consequences.) This was already obvious to David Ricardo, who commented: “Almost all taxes on production fall finally on the consumer.”

Another issue relates to what percentage of total revenues a government should collect from indirect taxes (sales taxes, taxes on tobacco, gambling, alcohol, gasoline, all kinds of transaction taxes, and import duties), which tend to be somewhat regressive, and how much it should raise through direct taxes (income, capital gains, property taxes, etc.). This is an issue that preoccupied John Stuart Mill, whose view was: “The very reason which makes direct taxation disagreeable, makes it preferable…. If all taxes were direct, taxation would be much more perceived than at present; and there would be a security which now there is not, for economy in the public expenditure”.

This is an excellent point. If every American had only to pay income taxes and the government collected no revenues from indirect taxes, which are less visible to people, there would likely be a revolution, because Americans would suddenly realise how much tax they were paying (my guess is around 25% of their income) for a government that is incapable of achieving any meaningful military successes abroad, that is failing to successfully implement a healthcare website for which it has already paid US$600 million, and which cannot provide a school system to which people are happy to entrust their children’s education.

However, by far the largest issue I have with PIMCO’s Bill Gross’s proposal to increase capital gains taxes (which I discussed in my essay “The World’s Only Popular Tax”) is that I oppose higher taxes under any circumstances because higher taxes allow the government to expand and, in the process of expanding, to retard economic growth and curtail individual freedom. Bob Hoye recently sent out a missive highlighting the difference between the expansion of the Fed’s balance sheet during the Second World War and since 2009.

According to Hoye, extraordinary funding measures between 1940 and 1944 were justifiable because “World War II was prosecuted in the defense of freedom”, whereas the recent increase “has been to fund the expansion of the state for the state itself” and “ironically, this has been part of a relentless attempt to extinguish freedom”.

But aside from this, we are all aware of how dysfunctional and wasteful the US government is. In some European countries, the situation is not much better or is even worse. Does anyone really want to give the government more money with which to wage additional senseless and extremely costly wars, and to distribute even more food stamps, and to allow even more people to receive disability benefits?
more @ dailyreckoning

Marc Faber
Marc Faber

Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.

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