H/T For Freedom's Sake & Boomerjeff! The Austrian Economist wrote a post titled, "Don't Let the Fox Guard the Chicken Coop." Good common sense advice, don't you think?
When asked to sum up his contributions to public economics, James Buchanan jokingly suggested that "Don't the the fox guard the chicken coop" might capture his basic point.
Among the many brilliant insights in Buchanan's work, his insistence on behavioral symmetry in the analysis markets and politics must rank at the top. Neither pure sinner, nor pure saint, but instead man as he is, interacts in the context of the marketplace, and in the context of politics. Same players, different games.
In his critique of Keynesian fiscal policy, Buchanan explained the possibility of the emergence of permanent deficit financing and accumulating public debt once the old time fiscal religion was abandoned. He provided the microeconomic explanation for this policy outcome, and a constitutional remedy as the only way to fix the situation. The constitutional remedy was ignored, and the facts of policy making since the time of his warning has illustrated his point about public finance and public policy making.
The Economist now reports that our current spending behavior has led us to the biggest bill ever ...
Hey ... guess what? The fox, er, uh, The Obama Administration, is hinting at VAT tax!
I am proud to announce that my Administration has lessened the tax burden on working families ... 95% of all working families will receive a tax cut. - President Barack Obama
From Mises Daily, "The Folly of the National Sales Tax."
Beyond the factual objection that a national tax on consumption would fall disproportionately on low-income consumers who spend a greater percentage of their income on consumption goods and save at a lower rate than do higher-income consumers, the VAT is a particularly odious proposal for all consumers because of its effect on overall economic activity.
Because it places an extra cost onto every step of the productive process, the VAT necessarily decreases the marginal productivity of both capital and labor in literally their every possible application. Without affecting the actual scarcity of the basic physical resources available for use in an economy, a value-added tax simply makes each step of each productive process less efficient, with a certain fraction of output being destroyed by government. The final result of this economywide loss in efficiency is a real increase in the scarcity of both capital goods and final consumer goods on the marketplace.
The VAT is a rare and heinous type of government policy that attacks not the ratios of exchange between certain goods, but rather the availability of every single good produced within a national economy. Put another way, a VAT has the ability to increase in real terms the prices of every good legally produced and sold within a country's borders. By decreasing the real output derived from national resources in this manner, the VAT necessarily decreases the material standard of living for all of a nation's consumers.
Furthermore, these effects are not mere theoretical points but real effects that are certain to be felt by the everyday consumer ...
The burden of a value-added tax would fall disproportionately onto those goods that require long productive cycles involving several processes and that result in a final good valued much more highly by society than the raw inputs they require — for example, automobiles and personal computers ...
During the beginning of a recession, as the insufficiency of real demand for these products becomes apparent to entrepreneurs, they must, in an attempt to return to profitability, decrease or halt the production of these long-processed goods, or reduce their price to market-clearing levels. However, by more harshly increasing the costs of long productive processes, a value-added tax would make that second option, a price reduction, impossible — or at least highly unprofitable and ultimately loss-inducing for makers of goods such as cars and computers. Therefore, the only alternative left to such firms facing a VAT in the event of a recession is to even more intensely halt their production of those goods, exacerbating the rise in unemployment of laborers within those industries.
As if this weren't enough, not only do all consumers face higher prices for everything, but the introduction of a VAT would tend to distort market signals of consumers' preferences between certain categories of goods. In the form of higher prices for highly-processed goods, a VAT sends entrepreneurs a phony signal that consumers prefer goods of high processing over those of low processing more strongly than they actually do ...
The most striking irony of the fact that the president's economic team is considering the VAT is that it stands in stark contrast to their economic policy paradigm thus far. As neo-Keynesians, top figures from Bernanke to Obama himself have blamed the recession on insufficient aggregate consumer spending by the private sector. It is curious, then, that these top-ranking left-liberal politicians and economists would even consider the implementation of a tax policy that would, as its explicit goal, increase the real price of literally every consumer good and thereby depress the overall efficiency and activity of the American private sector.
Hope and Change? Not even close.
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