A MINORITY VIEW
BY WALTER E. WILLIAMS
RELEASE: WEDNESDAY, AUGUST 20, 2008, AND THEREAFTER
Economic Myths
By taking a couple of courses in economic theory, we could immunize ourselves from nonsense spouted by politicians and pundits, but in the meantime check out Professor John R. Lott's "Freedomnomics: Why the Free Market Works."
His first chapter is "Are You Being Ripped Off?" It addresses myths about predation where it's sometimes alleged that corporations will charge below-cost prices to bankrupt their rivals and then charge unconscionable prices. There's little or no evidence that corporations would choose predation as strategy; there are too many pitfalls. A major one is that in order to recoup losses from charging low prices to bankrupt rivals, the predator would later have to charge higher-than-normal prices. That would attract new rivals who might have purchased the bankrupt assets of the predator's prey and be able to undercut the predator's prices.
A far more successful means to monopoly wealth is for businesses to enlist the aid of congressmen to form a collusion. Classic examples are the dairy industry, which uses the U.S. Department of Agriculture's Federal Milk Marketing Orders to set statutory minimum prices, or the Gasoline Retailers Association using state law to do the same or the sugar industry using Congress to establish quotas on foreign sugar imports.
Professor Lott's chapter "Government as Nirvana" highlights examples of government predation. When the U.S. Postal Service raised the price of first-class mail in 1999, it reduced its price for domestic overnight express mail from $15 to $13.70, even though it was losing money at $15. The Postal Service was facing stiff competition from FedEx and UPS overnight services and wanted to keep its market share.
During the 1980s, private meteorology firms saw a chance to make money by selling television stations specialized forecasts that weren't provided by the National Weather Service. The National Weather Service started providing television stations the same services for free, thus driving private forecasting companies out of business.
Predation is observed in higher education. UCLA is both Lott's and my alma mater. It spends $40,000 per student but charges $6,522 tuition for in-state students. Such below-cost pricing gives public universities a significant competitive advantage over private universities. State universities have acquired many formerly private universities after driving, or threatening to drive, them out of business. Lott gives examples of George Mason University School of Law, University of Buffalo, University of Houston and University of Pittsburgh. In the case of University of Buffalo, the State University of New York reportedly threatened to open a public university across the street unless the University of Buffalo joined the state system.
The U.S. Department of Justice would go after a private business using similar predatory practices of intimidating its rivals and selling goods and services below cost. The U.S. Department of Commerce sanctions foreign companies accused of selling goods in the U.S. below cost with anti-dumping duties. If selling goods below cost is seen as unfair in the international arena, why is it not when it's done by government entities?
Lott's "Crime and Punishment" chapter has a lot of interesting tidbits. It starts off stating a fundamental principle of economics: the higher the cost of something, the less people will do of it. To demonstrate the generality of this principle, Lott says that when the number of referees were increased from two to three in the Atlantic Coast Basketball Conference, fouls fell by 34 percent; fouling became more costly. The American League has more hit batsmen than the National League, but the difference only appeared after 1973 when the American League removed its pitchers from the batting lineup in favor of designated hitters. Not being afraid of being hit themselves, American League pitchers threw more bean balls; bean balls became cheaper. The same principle applies to the U.S. crime rate that fell after the death penalty was reinstated, more prisons were built and concealed-weapon carry laws were enacted. The higher the cost of a crime, the less people will do of it.
Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.
COPYRIGHT 2008 CREATORS SYNDICATE, INC.
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John Adams “The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.”
Ronald Reagan: 'Everybody that is for abortion has already been born'
"I never said I was worth it. I only said I wouldn't do it for less " William F. Buckley Jr.
Mr. Williams is right on as usual. I wish he had like addressed the myth that businesses pay taxes. Any "tax" paid by a business is included in the price of the product and passed on down through the chain until it is paid by the ultimate consumer, which is always going to be us. As I've grown up, I've concluded that the ignorance of the American taxpayer, voter, consumer is appalling. Everytime I hear someone complaining about "corporate tax loopholes" I'm tempted to pick up a blunt instrument and beat some sense into them.
May The Sheep Be With You
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Proud parents of our own "Daddy's Little Girls"
I heard Jesus He drank wine and I bet we'd get along just fine.
I wish he had like addressed the myth that businesses pay taxes. Any "tax" paid by a business is included in the price of the product and passed on down through the chain until it is paid by the ultimate consumer, which is always going to be us.
That is one view. Another view is that any business that raises its price above the rest of the market is going to lose business as consumers go to the low price producer, therefore they have to eat their increased costs -- including taxes -- in their profit margin. Additionally, there is also the view that in any market there is a relationship between price and market volume. If you increase your price, sales volume drops. It is a little more complicated than big bad controlling businesses just pass along all their costs to the the consumer and the consumer just has to shrug their shoulders and bear this offense.
Another view is that businesses pay ALL the taxes. For example, your employer has to pay you enough money to persuade you to work for him PLUS enough more money to pay your taxes. Your wages come from your employer, your taxes are withheld by your employer and sent directly to the tax man. In point of fact, your employer probably actually writes a check to the tax man or activates an electronic transfer of funds to the tax man . . . so he is literally paying your taxes for you. You can be said to work for your take home pay, and the employer has to shell out the additional money to pay the tax man, from this plausible view.
I wish he had like addressed the myth that businesses pay taxes. Any "tax" paid by a business is included in the price of the product and passed on down through the chain until it is paid by the ultimate consumer, which is always going to be us.
That is one view. Another view is that any business that raises its price above the rest of the market is going to lose business as consumers go to the low price producer, therefore they have to eat their increased costs -- including taxes -- in their profit margin. Additionally, there is also the view that in any market there is a relationship between price and market volume. If you increase your price, sales volume drops. It is a little more complicated than big bad controlling businesses just pass along all their costs to the the consumer and the consumer just has to shrug their shoulders and bear this offense.
Another view is that businesses pay ALL the taxes. For example, your employer has to pay you enough money to persuade you to work for him PLUS enough more money to pay your taxes. Your wages come from your employer, your taxes are withheld by your employer and sent directly to the tax man. In point of fact, your employer probably actually writes a check to the tax man or activates an electronic transfer of funds to the tax man . . . so he is literally paying your taxes for you. You can be said to work for your take home pay, and the employer has to shell out the additional money to pay the tax man, from this plausible view.
You're making it more complex than it really is in an attempt to save the myth that businesses pay taxes. Taxes are just another business expense that are passed on to the consumer in the cost of the product/service. People get confused because they see taxes as being computed on the net income of a business. But if you have prepared financial statements for business, as my husband has, you know that taxes are calculated on taxable income. Net income is what is left over after all expenses, including taxes, are paid. A business MUST have net income after taxes in order to stay in business.
Your second analysis would be true only if the product/service were not ultimately purchased by the consumer. If you work for a brewery, your employer will, of course be deducting taxes from your check and turning the money over to the government. But every time you, or anyone else, buys a beer, the employer is being reimbursed for all that money turned over to the government. Exotic analyses cannot disguise the fact that businesses pay no taxes. All the money is ultimately collected from the consumer.It would really help if people could make the effort to understand this.
May The Sheep Be With You
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Proud parents of our own "Daddy's Little Girls"
I heard Jesus He drank wine and I bet we'd get along just fine.
Well, I suppose that ultimately every business transaction ultimately can be traced back as funded by a consumer purchase. When Intel buys 20 tons of sand for refining into silicon chips that it will sell to Motorola for making mobile phones thatMotorola will sell to Verizon that Verizon will sell to an end consumer . . . yes, I suppose you can argue that the end consumer injected the money into the system and all the taxes were therefore paid based on the injection of that money into the system.
But I don't know what profound point you think you are making. I could probably continue in your vein of analysis, in a reductio ad absurdum, and trace all money back to farmers planting a seed in the ground and producing food which we all purchase. For example, when I purchase the phone from Verizon it is using money I earned from someone else paying me to produce an intermediate good -- the ultimate and most fundamental good that cannot be traced furtherand may be viewed as the most fundamental of wealth creation may be food production. So wouldn't it be the case that farmers, ultimately, pay all the taxes?
From the viewpoint of how our government funds its activities, I don't think it is beside the point to say that corporations and businesses pay taxes. I also don't think it is beside the point to observe that if, tomorrow, businesses were relieved of the burden of paying taxes that this wouldn have a significant impact on the government's fundingand on the retained earnings of businesses. But . . . you are free to disagree.
Seems to me businesses do not pay taxes per se, because indeed if they are jacked up, they pass them on and net the same profit. Presumably, competitors also had their taxes jacked up and passed them on as well, eliminating their relative lower cost. If one business' taxes were increased, but not its competitor, yes, the business with the higher taxes would have a harder time passing them on without losing business to said competitor. It does get more complicated when you consider elasticity of demand due to higher cost to the consumer (ie. go without before paying more money for products)and substitute goods from businesses that are not the target oftax increases.
My bet is that if the taxes on my law firm were increased, we would not be able to raise our rates charged to our clients, we would just eat the tax increase. Maybe other service based business people can comment on this. Even in the world of manufactured products, do you think Ford can increase the price of their cars -- in lock step with Chevrolet and Dodge -- or is that going to shift their customer base, so they are stuck selling fewer cars to a higher price point customer or maybe even losing a customer becasue the higher price point customer is not a Chevrolet customer but instead a different make customer?
I don't know. It really sounds too easy for a business just to pass on costs transparently to customers. I have to think something derails that model of business thinking. I think it may depend on whether your customer is cost sensitive or not. You have to buy milk, you are going to pay the price charged. You don't have to buy donuts. Maybe you switch from buying 12 cinammon rolls to 12 glazed donuts, which is a different more commoditized product with less profit margin for the donut maker (speculation on my part, I'm not an expert in donut making economics). Customers are very fickle. How about raising prices on laundered shirts? Increase tax and they can just up the cost of shirts -- no longer $0.99/shirt but instead $1.09/shirt??? Aren't some customers going to shop around and find someone willing to undercut the $1.09/shirt laundry?
If all car manufacturers raised prices to cover taxes, the relative difference in price is unchanged, hence no flight to another car manufacturer. But yes, customers can do without certain goods, or possibly find cheaper alternatives, including doing their own laundry in your shirt example. In those cases, they may have to eat at least some of the tax increase to keep from a dramatic reduction in business.
find cheaper alternatives, including doing their own laundry in your shirt example.
Or we sacrafice and marry real well. In fact, I broke up with a gal because she ironed wrinkles into my shirt. On the other hand, my wife claimed I suckered her into marrying me because the first night over to my house, I was ironing my weekly shirts.
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John Adams “The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.”
Ronald Reagan: 'Everybody that is for abortion has already been born'
"I never said I was worth it. I only said I wouldn't do it for less " William F. Buckley Jr.
For $1/shirt I don't see how I can ask my wife to press my shirts. I would rather her spend her time on other stuff, her time is more valuable spent on other stuff.
Economic Myths
May The Sheep Be With You
