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R. D. Skidmore

Taxation: The Cost of Living
By R.D. Skidmore, Prof.
Oct 8, 2003 - 12:37:00 PM

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Government has a role and the intended structure of government the founding fathers established was one where the people delegate limited responsibilities to government. One can easily wonder if our progressive politicians understand that important point with their myriad of tax and spend programs.
R.D. Skidmore, Prof.

Taxes are a requirement for government to function, however, the taxes exacted to cover government spending does have its effect on all of us.

Imagine that I hire you to repair my automobile. We decide that the job is worth $300. The transaction will occur because of our agreement on what is to be done and its worth.

Now assume that government imposes a 25% income tax on you to do the job. This means that instead of receiving $300 you now will receive only $225. You might say, nuts to this job, I can spend the day doing something else that is worth more than $225.

Another scenario might be that you want the job, will pay the tax, but require that you end up with $300. In order to accomplish this goal you must charge me $400. You arrive at the $400 because after taxes you net $300. Now it is my turn to say no.

This example demonstrates that one effect of taxes is that of eliminating transactions, which in turn can eliminate jobs, reduce tax revenues and send business out of town.

Unfortunately, progressive politicians never view the elasticity of commerce. They believe people will behave after taxes just as they behaved before taxes and that the only effect is increased tax revenues that government receives. However, you and I operate in our own best self-interest, and if you and I agreed to the repair job but left government out, we would be criminals.

Let’s pose another taxing question: Two workers producing shoes. One produces shoes only with hand labor and a few tools; this worker is able to produce one shoe each day. Another worker has a shoe-making machine and is able to produce 30 shoes each day. Which worker should receive the higher pay for shoe making? If you say the guy with the shoe-making machine then move yourself to the head of my class.

But why? Is it because one is unionized or that customers prefer shoes made with machines? It’s because the worker with the machine is more productive, and he is more productive because he has more capital (tools) with which to work. Economists say that generally the more capital workers have to work with, the higher their pay.

So let’s pass a higher minimum wage law for the less productive shoemaker! The effect for this kind of law eliminates people from the workforce. If there are teenagers that need part time jobs to get job skills, and are not worth the mandated minimum wage because they lack skills, then minimum wage laws tend to exclude them from the workforce.

A better policy is to keep the cost of capital formation low, so that companies will take more of their profits and invest them in more capitalization (machinery that improves productivity). Policies that raise the cost of capital formation and lower risk-taking are high corporate taxes, low allowances for depreciation and increase capital gains taxes.

If you are like me and want to see higher wages and higher productivity gains, then you will champion tax reductions.

In the past few years we have witnessed government attack tobacco companies, levying punitive taxes, penalties and court settlements even though people consumed a perfectly legal product. One wonders how tobacco companies survive and remain profitable in light of the multi-billion dollar fines these companies are faced with?

The answers are quite easy. Corporations increase the cost of their products that consumers purchase and thus pass taxation, penalties and settlements onto the consumer. In effect they act as the tax collector and bailiff for government.

As progressive politicians finagle with new taxes, decrying to the public that corporations do not pay their “fair share” of the tax burden, they fail to call to your attention the economic axiom of the incidence of taxation. This axiom says that the party upon whom a tax is levied does not necessarily pay the tax. They may shift it onto some other party, which is what corporations do when progressive politicians decide to get a “fair share” of their revenue. The corporation merely becomes the tax collector.

So in the case of the government punishing the tobacco companies, government is actually punishing the smokers—those who purchase the tobacco company products.

As government decides to attack the fast-fat-food business with “fat taxes,” those businesses will raise the cost of their product, passing the added “fat tax” on with each purchase. The result will be that we will buy fewer hamburgers.

R.D. Skidmore is a professor at Pierce College in Woodland Hills, Ca. He may be contacted at rskidmor49@excite.com.


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