Politicians Exploit Economic Ignorance

[Fieldmouse]

A MINORITY VIEW
BY WALTER WILLIAMS
RELEASE: WEDNESDAY, OCTOBER 6, 2010

Politicians Exploit Economic Ignorance

One of President Obama's campaign promises was not to raise taxes on middle-class Americans. So here's my question: If there's a corporate tax increase either in the form of "cap and trade" or income tax, does it turn out to be a middle-class tax increase? Most people would say no but let's look at it.
There's a whole subject area in economics known as tax incidence -- namely, who bears the burden of a tax? The first thing that should be recognized is that the burden of a tax is not necessarily borne by the party upon whom it is levied. That is, for example, if a sales tax is levied on gasoline retailers, they don't bear the full burden of the tax. Part of it is shifted to customers in the form of higher gasoline prices.
Suppose your local politician tells you, as a homeowner, "I'm not going to raise taxes on you! I'm going to raise taxes on your land." You'd probably tell him that he's an idiot because land does not pay taxes; only people pay taxes. That means a tax on your land is a tax on you. You say, "Williams, that's pretty elementary, isn't it?" Not quite.
What about the politician who tells us that he's not going to raise taxes on the middle class; instead, he's going to raise corporate income taxes as means to get rich corporations to pay their rightful share of government? If a tax is levied on a corporation, and if it is to survive, it will have one of three responses, or some combination thereof. One response is to raise the price of its product, so who bears the burden? Another response is to lower dividends; again, who bears the burden? Yet another response is to lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of the tax.
Because corporations have these responses to the imposition of a tax, they are merely government tax collectors. They collect money from people and send it to Washington. Therefore, you should tell that politician, who promises to tax corporations instead of you, that he's an idiot because corporations, like land, do not pay taxes. Only people pay taxes.
Here's another tax question, even though it doesn't sound like it. Which workers receive higher pay: those on a road construction project moving dirt with shovels and wheelbarrows or those moving dirt atop a giant earthmover? If you said the worker atop the earthmover, go to the head of the class. But why? It's not because he's unionized or that construction contractors have a fondness for earthmover operators. It's because the worker atop the earthmover is working with more capital, thereby making him more productive. Higher productivity means higher wages.
It's not rocket science to conclude that whatever lowers the cost of capital formation, such as lowering the cost of investing in earthmovers, enables contractors to purchase more of them. Workers will have more capital to work with and as a result enjoy higher wages. Policies that raise the cost of capital formation such as capital gains taxes, low depreciation allowances and corporate taxes, thereby reduce capital formation, and serve neither the interests of workers, investors nor consumers. It does serve the interests of politicians who get more resources to be able to buy votes.
You might wonder how congressmen can get away with taxes and other measures that reduce our prosperity potential. Part of the answer is ignorance and the anti-business climate promoted in academia and the news media. The more important reason is that prosperity foregone is invisible. In other words, we can never tell how much richer we would have been without today's level of congressional interference in our lives and therefore don't fight it as much as we should.
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 2010 CREATORS.COM

[Alsatian]

OK. I generally agree with the point that "no tax increase for the middle class" is at least somewhat a matter of political mumbo jumbo, that the proposition that raising taxes on the rich or on corporations should be of no concern to those in the middle and lower economic class is nonsense.

What I would like to challenge is the proposition that increased worker productivity implies increased worker compensation. That sounds nice in theory, but I don't think it is realized often in practice. Let me discuss further.

I would propose a different functional relationship for worker compensation. From my point of observation, it appears to me that worker compensation depends on labor market conditions. Company X and Company Y are not going to pay Bill more than what they calcualte Bill can earn in the labor market. This calculation may include considerations of whether Bill is willing to move out of town for a better paying job (local prevailing compensation standards). This calculation may include considerations that Bill isn't likely to move for equal money but an increase -- thus if you pay Bill 98% of the market rate, Bill isn't likely to change jobs. Maybe in some circumstances you may calculate that you can pay Bill 90% of the market rate and Bill still isn't likely to change jobs.

Now, to continue the analysis, suppose Company Y increases its worker productivity by either upgrading its equipment -- from shovels to earthmover equipment -- or by making a creative breakthrough. Company Y's workers are now more productive than Company X's corresponding workers. The $63 question . . . does Company Y now increase the compensation of its workers because they are more productive? My answer is, heck no, they continue to be paid the prevailing wage which has not changed. The increase of productivity is exploited as a rent by Company Y. The rationale for this is that Company Y needs to make a profit on its increased capital investment relative to Company X which has kept its corresponding capital in the bank making interest or in securities earning dividends. Alternatively, if the increased productivity is based on a better idea -- still the intellectual property that is the basis of this better idea is the property of Company Y, and they ought to be able to take the profits from this intellectual property.

I've got no particular objection to this situation, but I do think it is a bit naieve -- or disingenuous -- to propose that as worker productivity goes up workers necessarily get paid more. I think the role of productivity here only sets a ceiling for wages. You are rarely going to be paid by an employer more than the value you produce which is a function of your productivity. Nothing, other than the prevailing labor market wage standards, prevents you from being paid less.

I will take the liberty -- after all, I have already sort of hijacked the thread, why not go all in? -- to express my unhappiness that business in the United States does not seem to give workers a fair shake. Formerly it was said that a rising tide lifts all boats. This meant that if the economy grew and was strong, the CEO of Fortune 500 companies would do well but also that the machinist on the shop floor would do well. That no longer happens in MOST circumstances. I think that long term that is going to have negative results. Maybe we are seeing it now, with people willing to rely increasingly on government to call the shots and extract more revenue from businesses/rich? Without necessarily rationally analyzing and understanding what is going on, they may feel that they are doing what they are supposed to do but are getting the short end of the stick. I'm not saying that is my circumstance -- by luck, by diligence, by investing in my education, by managing my career, by shrewdly analyzing circumstances, I have managed to do OK and experience an improving standard of living. Many folks who have worked hard and done everything that could have been asked of them, however, are NOT experiencing an improving standard of living though the tide has been rising. I think, long term, this is not in the selfish self-interest of businesses.

When workers see that their hard work and diligence is not rewarded equitably, they are smart enough to figure this out and do not work as hard. The wealth generation cycle is diminished. It is the argument I and others make all the time for why socialism and communism are sub-optimal economic systems -- people are not motivated to work hard. Why doesn't the same analysis apply under the circumstances I've described above? Work hard, be reliable, do what is needed, and still experience an inexorably declining real standard of living . . . though the economy is growing! People in these circumstances find socialism -- or soft socialism along the European model -- pretty attractive. And they aren't necessarily going to carefully think everything through, analyze the circumstances, and see the problems Europe is experiencing with soft socialism. They are pretty sure they're getting a raw deal under the present circumstances.

I have seen statistics advanced showing, contrary to my information above, that real standards of living are rising for the majority of us. Maybe, but I suspect not. Possibly this improvement is hidden from my view -- which I acknowledge is imperfect and is subject to all the selective perception problems that most of us are subject to -- for example by the increased consumerism of all of us. How many low income people have an iPhone and corresponding $40/month data plan now? Cable TV? Eat out in restuarants a lot? Maybe the increased standard of living gets chewed up in such increased discretionary spending.

Well, I've said enough on that subject. (Step down off the soapbox, Alsatian!!!)

[Fieldmouse]

well, some of your points do have merits. You get paid what you're worth and that means what the prevailing wages are for your particular industry. However, to run the required equipment requires skill and knowledge that just doesn't always grow on trees. If a company has to retrain workers due to turnover, that hurts profits and kills productivity. So company have pay raisies as well a other perks to keep the employee working at their company. Also, I learned in the last few weeks where all these non paycheck perks derived from. During WW2, the government felt it wasn't fair for companies to steal other companies employees by enticing them with better pay. So they put in place wage and price controls. Companies always find ways around stupid laws and they invent perks like medical benifits.

As far as a rising tide raises all boats. The evidence is claer that it does indeed happen. Sorry to repost this twice in one week but these numbers are real and they don't lie.
http://econfaculty.gmu.edu/wew/artic...meMobility.htm

The Nov. 13 Wall Street Journal editorial "Movin' On Up" reports on a recent U.S. Treasury study of income tax returns from 1996 and 2005. The study tracks what happened to tax filers 25 years of age and up during this 10-year period. Controlling for inflation, nearly 58 percent of the poorest income group in 1996 moved to a higher income group by 2005. Twenty-six percent of them achieved middle or upper-middle class income, and over 5 percent made it into the highest income group.

Over the decade, the inflation-adjusted median income of all tax filers rose by 24 percent. As such, it refutes Dobbs-Edwards-Huckabee claims about stagnant incomes. In fact, only one income group experienced a decline in real income. That was the richest one percent, who saw an income drop of nearly 26 percent over the 10-year period. The editors explain that these people might have been rich for a few years, had some capital gains, or could not stand up to the competition with new entrepreneurs and wealth creators.

The U.S. Treasury study confirms previous studies dating back to the 1960s, concluding, "The basic finding of this analysis is that relative income mobility is approximately the same in the last 10 years as it was in the previous decade." As such, it points to a uniquely American feature: Just because you know where a person ended up in life doesn't mean you can be sure about where he started. Most of today's higher income and wealthy did not start out that way.

What about claims of a disappearing middle class? Let's do some detective work. Controlling for inflation, in 1967, 8 percent of households had an annual income of $75,000 and up; in 2003, more than 26 percent did. In 1967, 17 percent of households had a $50,000 to $75,000 income; in 2003, it was 18 percent. In 1967, 22 percent of households were in the $35,000 to $50,000 income group; by 2003, it had fallen to 15 percent. During the same period, the $15,000 to $35,000 category fell from 31 percent to 25 percent, and the under $15,000 category fell from 21 percent to 16 percent. The only reasonable conclusion from this evidence is that if the middle class is disappearing, it's doing so by swelling the ranks of the upper classes.

What about the concentration of wealth? In 1918, John D. Rockefeller's fortune accounted for more than half of one percent of total private wealth. To compile the same half of one percent of the private wealth in the United States today, you'd have to combine the fortunes of Microsoft's Bill Gates ($53 billion) and Paul Allen ($16 billion), Oracle's Larry Ellison ($19 billion), and a third of Berkshire Hathaway's Warren Buffett's $46 billion. In 1920, America's richest one percent held about 40 percent of private wealth; by 1980, the private wealth held by the richest one percent fell to about 20 percent and has remained stable at that level since.

Now for the standard of living. Look around, our standard of living has clearly risen to all time highs. http://econfaculty.gmu.edu/wew/artic...rty%20Hype.htm

Falling real prices help explain rising living standards. Years ago, a worker earning the average wage had to work 365 hours to purchase a VCR; today it's two hours. A cell phone dropped from 456 hours of work in 1984 to four hours today. A personal computer, with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours of work to 25 hours.

Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cell phones have reached more than 80 percent of households. Yesteryear, only the well-to-do could afford many of these items.

Dr Williams is right on target with the title of this article. We have too many people in this country who can be manipulated because they are simply ignorant of the facts. The real shame today is the fact they have more information at their finger tips then ever before that would put an end to their ignorance. However, I bet over 50% of our population prefer to be going thru life blind.

[vc1111]

We have too many people in this country who can be manipulated because they are simply ignorant of the facts.

Our educational system usually sends our citizens into the world with next to no knowledge of economics, let alone the complexities of governmental monetary and fiscal policies.

As we speak we have a large percentage of this nation still believing that if the economy fails to produce jobs, the government can push a few buttons and voila! Prosperity and joy will reign all over the land.

Me? I'm still waitin' for my stimooles check

[burniegoeasily]

Originally Posted by vc1111

Our educational system usually sends our citizens into the world with next to no knowledge of economics, let alone the complexities of governmental monetary and fiscal policies.

As we speak we have a large percentage of this nation still believing that if the economy fails to produce jobs, the government can push a few buttons and voila! Prosperity and joy will reign all over the land.

Me? I'm still waitin' for my stimooles check

You mean the half semester of government and the half semester of economics Sr. take is not sufice to prepare our youth. Surely you jest.

[vc1111]

Your just trying to on my good side so's you can get half of stimuloos check. You'd just waste it on old Pink Floyd albums and the money would wind up in some British bank.

I'm spending my stimalas money on filling up my Ipod Nano with Seasick Steve albums.