Thoughts on the Economy and Tax Policy

by Bob Williams

Politicians face the necessity of raising revenues in order to finance the good and bad legislation that they have enacted. It is no surprise to anyone that the usual approach is to levy taxes. So as legislators look for ways to increase taxes in the most inconspicuous way (they must face reelection), two ideas emerge: tax the wealthy and use the tax as a vehicle for accomplishing some other objectives. The results are luxury taxes and taxes hitched to goods and services that the legislators wishes to discourage.

BLIND ECONOMY

The key ingredients of a prosperous economy are sound currency, secure property rights (including all ramifications with respect to business conduct), low tax burdens, and very limited restrictions on the formation of new businesses. To the extent that it can be achieved without damaging leverage, the big economic driver is money velocity. That is, when people buy and sell goods and services, while acting within their economic means, they produce an economy that is prosperous in proportion to the rate of exchange of money. The only important parameter in this exchange is the net value of the goods and services which are bought and sold.

It is my contention that a free enterprise economy is blind to the merits of its products. When people make free choice selections, they naturally prioritize their needs and values. Some people have argued that the economy is better when "good" products and services are exchanged and worse when "bad" ones are exchanged. The gist of their arguments is that a good product or service is one that meets important needs of the infrastructure or of individual survival. Thus, a truck sold to a corporation that delivers work clothing is a net contributor to the well-being of the economy, while a piece of jewelry is wasteful and "bad." The argument is wrong. There is a saying that goes something like "All money is green." Money is not tied to specific goods and services and is no more or less valuable when spent on one than another.

Wasteful consumption is not an evil and it is not a drag on any economy. In fact, wasteful consumption is only a matter of individual definition and those definitions are often constructed on the basis of moral beliefs instead of careful observation of the relationship of the consumption to economic prosperity. Let's invent an extreme example. Consider a manufacturer of TV sets. It makes a nice 13" color sets and sells them for $300 each. Let's suppose that a rock musician takes a fancy to buying truck loads of these televisions and tossing them from the roof of his mansion into his swimming pool. What is the effect on the economy? Answer: positive. There is nothing constructive about the application this consumer has for the TV sets, but he is not borrowing money to buy them; he is injecting money into the economy, benefiting the employees who make and test the televisions, the company accountants, insurance providers, shippers, parts suppliers, and ultimately, the cleaning crew who will shovel out the swimming pool and dispose of the shattered televisions. His symbolically worthwhile hobby does not deny televisions to other consumers, nor does it harm the economy.

In an industrial society, a huge fraction of the goods and services sold are of non-essentials and luxury items: soda, cigarettes, whisky, jewelry, computer games, ornaments for cars and homes, comic books, adult interest magazines, art, television broadcasting, basketball, recorded music, opera tickets, elective plastic surgery, girdles, high heeled shoes, hair coloring, calory laden deserts, etc. If we consider the producers of nonessential items, we find ourselves looking at such companies as Wrigley, Borden, Anheuser-Bush, Microsoft, Coca-Cola, Philip Morris, Playboy, Disney, Jenny Craig, Circus Circus, Time Warner, Gillette, Procter & Gamble, and hundreds of others. Many of these companies supply essential goods along with the fluff and the luxury, but their bottom line does not reflect what they sold, but rather how much of it they sold. Take away the nonessential products from the largest 100 companies and many would be destroyed; take away the same from large and small companies and the economy would be wrecked.

PUNITIVE TAXES

This leads us to the point of whether the government should attempt to micro manage both the economy and individual consumption by applying punitive taxes designed to destroy segments of the economy, specifically those selling "wasteful" and "luxury" goods and services. In 1990, Congress enacted a 10% luxury tax that applied to the private consumption of boats, airplanes, cars, jewelry and furs. They had the misguided belief that these luxury items only benefited the wealthy and that it is always safe to tax the rich. Congress overlooked the well known demand curve and the basic concept that such pricing burdens will always fail if the slope of the demand curve is steep (highly elastic). Most of us know the result--people who were able to buy these "targeted" goods took their money elsewhere. Within one year, boat sales in South Florida fell by 90% as buyers went to the Bahamas. Tens of thousands of jobs were lost within the boating industry in only 18 months. Many builders and launchers in New England reported that their sales and backlogs had fallen to zero. Similar results were seen in the other affected industries. In 1993 the law was repealed. The victims were not the targeted wealthy, but the workers who lost their jobs. Interestingly, the tax produced only one hundredth of the revenues projected by Congress, and that is before accounting for implementation costs.

UTILITARIANISM

Applying taxes to control consumption doesn't work because the laws destroy otherwise productive parts of the economy--businesses which contribute jobs, taxes, and sales. Besides that, the taxes fail because the legislators who devise the tax structures are not smart enough to see the damage they are about to inflict and not responsible enough to act according to what is good for the economy and in compliance with the Constitution (specifically the 9th and 10th Amendments). Governments have no business making value judgements as to how people should spend money, as in whether they should enjoy an expensive watch or whether they have personal or religious beliefs that cause them to wish to spend large sums of money on a funeral. If government can dictate such choices, it can dictate anything else, including the quality of beer people drink, the size of their television sets, the number of football games they attend, or the size and quality of home they purchase.

One does not have to be wealthy to enjoy nonessential levels of luxury. On the basis of utility per dollar, we would maximize our return by drinking coffee from Styrofoam cups and eating with plastic utensils. Many people, however, appreciate the decadence of drinking from a china cup and eating with silverware. In doing so they are reaping the pleasures of life--not assailing the economy.

Under Chairman Mao, China experimented with utilitarianism. The government decided that makeup was frivolous and wasteful; people were forced to dress alike in drab garments; there was no diversity and no need or opportunity to make choices. The elimination of frivolity didn't make China a great nation, stimulate its economy, or create a happy place to live.

ADVERTISING TAX

The engine of the free economy is competitive selling. It is the magic which moderates prices, provides a wide range of goods and services, and motivates companies to offer what the consumer wants, at competitive prices for the item in question. These benefits apply to all markets in a free economy, as long as the markets are truly free from tax-tampering. Some people have suggested taxes on advertising, apparently because it appears to be a form of luxury to businesses. The basic ingredient of marketing, advertising has an obvious correlation to the vitality of the economies of industrialized countries. [By the late 1980s the advertising industry in the U.S. accounted for annual revenues in excess of $120 billion. Advertising is the economic basis of the broadcasting and print industries.] Sellers must find buyers by connecting the attraction of their goods to the interests of the buyers. Even if the product is as unnecessary and objectionable as chewing gum, the process remains the same. Taxing advertising for the express purpose of making it more costly is an attack on free enterprise selling and ultimately on the economy. Additional taxes create obstacles to the development of new and prospering businesses. The Russians have given us a dramatic demonstration of the inability of central planning to substitute for the self-correcting free market. Even today, after the fall of Communism, Russia is struggling to develop a free economy, while burdened by taxes that are so excessive and pervasive that businesses must violate the tax laws in order to survive.

TAXING PENNIES

Anyone doubting that our existing tax laws are not already out of hand should pay a visit to the library and take a look at the tax code books. Just the federal tax laws occupy volumes the size of a large encyclopedia set. There is no way that the taxpayer can read and understand the contents of these volumes. As I write this, I am struggling with my 1997 federal taxes . I have had to spend up to 2 hours each on tiny items that are required by law. I have entries for $10.54, $33.34, $32.77, $7.00, $9.52, $0.64 and $0.57. Most of these require the addition of special forms to document trivia.

I suggest a simple fix: specify that the tax law be written at the 5th grade level and that every word of the law should be easily read by a person of average reading ability in one hour. That should eliminate the practice of micro management by taxing every two bit transaction.

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