The Mysterious Case of Disappearing Prosperity

There is a reason that Walter Williams is in the top five star hitters of economists: his reasoning is so clear, his examples so down-to-earth, and his common sense so obvious that a middle-schooler would find his explanations accessible.

Some people have a gift for explaining and entertaining. Not enough of them become teachers, as those of us who have fallen asleep in class can attest. But Dr. Williams can do both, and if there were a hundred more of him speaking out, Americans would not be permitting the casual rape of their economy by the Obama Gang of One.

What follows is a good example of Dr. Williams' reasoning. He’s explaining how prosperity disappears. Along the way he gives us a few other lessons:

Ask the average person which is the correct answer to the following question: Which president gave the biggest tax cuts for the rich-Reagan or Bush? I would bet the rent money that you would not get the correct response, which is: Presidents have no taxing authority.

Article I, Section 8 of the U.S. Constitution says: “The Congress shall have power to lay and collect taxes, duties, imposts and excises.” I know that many politicians and news media people read my column. How do we characterize them if they continue to speak of presidents cutting or raising taxes?

Well, professor, since this is a PG-13 blog, I’d characterize them as ignorant at best. In fact, they ought to be held partially responsible for the mess we’re in. What they know about the Constitution you could fit in a thimble and have plenty of room left for their integrity. Even if their knowledge is crystal clear that Congress regulates the levying of taxes such comprehension will not change their reporting. The MSM is fading partially because they do not hew to the truth, Professor. Instead, they stick to what will further The Cause.

Another tax question:

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If there’s an imposition of a property tax on your land, who pays the tax? I guarantee you that 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?” But what do you say to a politician or news media people who propose increasing corporate taxes as means to get rich corporations to pay their rightful share of government? They should be told that they speak nonsense because corporations, like land, do not pay taxes; only people pay taxes.

If a tax is levied on a corporation, and if it is to survive, it must raise the price of its product, or lower dividends or lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of any tax levied on the corporation. An important subject area in economics called tax incidence says that the entity upon whom a tax is levied does not necessarily bear the burden of the tax. Some of the tax burden can be shifted to another party. That’s precisely what corporations do and as such they are merely government tax collectors.

Ah, yes. But you forgot to mention that the higher prices make the Eeevil Kapitalists look bad. Government gets away with another scam and lives another day to raise taxes in some other sector. Government is always hungry and can barely exist on the paltry amounts it confiscates now.

Here’s another tax question: Which worker receives the higher pay: a worker on a road construction project moving dirt with a shovel or a worker moving dirt atop a giant earthmover? If you said the guy on the earthmover, go to the head of the class. But why? It’s not because he’s unionized or that employers just love earthmover operators. It’s because having more capital (tools) makes him more productive and therefore earn higher wages.

It’s not rocket science to conclude that whatever lowers the cost of capital formation enables workers to have more capital to work with and enjoy higher wages. Policies that raise the cost of capital formation such as capital gains taxes, low depreciation allowances and high corporate income taxes, and thereby reducing capital formation, serves neither the interests of workers, investors nor consumers.

However, such policies feed the government and that’s the whole point. The government has long since ceased to serve the people. Instead, people exist to churn out food - in the form of money - for the bottomless pit of government’s stomach. Meanwhile, ask someone how much money they make and they’ll tell you their gross salary, which is a gross fabrication. What they truly earn is what is left after government eats (more than) its share of the pie. Anyone who is self-employed has long since learned to sneer at that airy-fairytale.

The invention of withholding taxes from the employed was diabolically clever. Now, when folks get a tax “refund” it is mentally processed as a “gift” from the government. In reality, if withholding tax has to be done at all (for our own good), we at least ought to get some interest back on what they kept for the year . But don’t hold your breath waiting for fiduciary fairness. Ain’t ever gonna happen as long as bureaucrats are in charge.

Taxes also reduce transactions. I need my computer repaired. You and I agree that the job is worth $200. Suppose there’s the imposition of a 30 percent income tax on you. That means you would net only $140 and might refuse the job. You might suggest that if I were willing to pay you $285 you would do the job because at that price your after-tax earnings will be $200 -- what doing the job is worth to you. There’s a problem. The repair job was worth $200 to me, not $285. So it’s my turn to say the heck with it, or would we and society be better off if you and I agreed to the repair job but did not tell anybody? I’d say yes, but we’d be criminals.

Every tax raise breeds more of these “criminals”. The coming implosion of the economy will see an explosion of “off-the-books” employment. Here’s one view:

As many as 52 million people could lose their jobs from the economic crisis worldwide, says the International Labour Organization, an agency of the United Nations. Without the informal sector, many of them will have nowhere to go.

Informal jobs “will absorb a lot of people and offer them a source of income” over the next year, says W.F. Maloney, an economist at the World Bank in Washington. There are also some informal workers in the U.S. and other wealthy countries, including off-the-books maids, gardeners and “gypsy” cab drivers, though the phenomenon isn’t nearly as widespread as in the developing world. Analysts say it may add up to as much as 10% of the overall U.S. economy, and probably is growing now that employers are slashing staff, forcing more people to try their own small-scale businesses or make do with part-time contract work.

Massachusetts, in a laughable attempt to curtail “fraudulent” economic activity, has created something called the “Joint Task Force on the Underground Economy and Employee Misclassification”. These bureaucrats even have a toll-free number you can call to turn in the crooks. Ah, happy new Soviet Day. We get to spy on one another. I wonder if they offer rewards? If they do, the calls will certainly increase. Everyone will be looking for a way to pay the bills and the job of informer has a long, if disreputable pedigree.

Massachusetts is infamous for the most fraudulent public project in recent memory: The Big Dig. Here is a report from the Boston Globe from last July:

Massachusetts residents got a shock when state officials, at the peak of construction on the Big Dig project, disclosed that the price tag had ballooned to nearly $15 billion. But that, it turns out, was just the beginning.

Now, three years after the official dedication of the Central Artery/Third Harbor Tunnel, the state is reeling under a legacy of debt left by the massive project. In all, the project will cost an additional $7 billion in interest, bringing the total to a staggering $22 billion, according to a Globe review of hundreds of pages of state documents. It will not be paid off until 2038.

Contrary to the popular belief that this was a project heavily subsidized by the federal government, 73 percent of construction costs were paid by Massachusetts drivers and taxpayers. To meet that obligation, the state’s annual payments will be nearly as much over the next several years, $600 million or more, as they were in the heaviest construction period.

Big Dig payments have already sucked maintenance and repair money away from deteriorating roads and bridges across the state, forcing the state to float more highway bonds and to go even deeper into the hole.

Among other signs of financial trouble: The state is paying almost 80 percent of its highway workers with borrowed money; the crushing costs of debt have pushed the Massachusetts Turnpike Authority, which manages the Big Dig, to the brink of insolvency; and Massachusetts spends a higher percentage of its highway budget on debt than any other state.

Large government oaks from little acorns grow. When this project was proposed in 1983, the cost was supposed to be one-fiftieth of what it turned out to actually cost. And they only held it down to that by lopping off original parts of the proposed plan. In other words, they don’t call it Taxachusetts for nothing.

Back to Dr. Williams:

You might wonder how congressmen can get away with taxes and other measures that reduce our prosperity potential. Part of the answer is 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.

He’s right. You can’t fight what isn’t there. Which is why, unless you’re willing to live outside the law, government always wins. It is as though they have set out to prove that crime does pay. In fact, criminals are often aided, abetted, and bailed out by government.

This has led to cynicism, indifference, and quiet defiance on the part of individuals who aren’t looking for a bail-out. As far as they are concerned, the actual quote would read: “Hi, we’re from the government and we’re here to eat you.”

Ronald Reagan put it best:

“The government’s view of the economy could be summed up in a few short phrases:

1.If it moves, tax it.
2.If it keeps moving, regulate it.
3.If it stops moving, subsidize it.”

Our nation is all the more poverty-stricken for the disappearance of politicians who could lead and who operated from a firm set of principles formed by experience and integrity. Our present situation, however, is simply another example of what is missing.

It's a case of the disappearance of public virtue. And if you imagine that Obama has this quality, just (for starters) look at the book deal he signed a few days before he took office.


Update: Thanks to alert reader Independent Accountant, I’ve corrected my mathematical error.