Quotation of the Day…

by Don Boudreaux on August 13, 2022

in Seen and Unseen, Taxes

… is from page 411 of the late, great Armen Alchian‘s 1955 paper, co-authored by Reuben Kessel, “How the Government Gains From Inflation,” as this paper is reprinted in The Collected Works of Armen A. Alchian (2006), Volume 1 (“Choice and Cost Under Uncertainty”; Daniel K. Benjamin, ed.):

However, if the government extracts resources from the community, in particular capital goods, and destroys them, the ratio of capital to labor will decrease, and the total national income will also decrease…. In this event, there will be a decrease in real wage rates resulting from the changed marginal productivity of labor.

DBx: Indeed so.

Keep this reality in mind whenever you hear self-styled champions of working men and women call for higher taxes on “the rich.” Most of the wealth of the rich in market-oriented economies is not in the form of mountains of consumption goodies stashed in the great rooms of gaudy mansions; this wealth is invested in companies. And so if Jeff Bezos is slammed with increased tax liabilities, he‘s unlikely to trade in his private jet in order to fly commercially, or to reduce his consumption of premier cru wines as he drinks more Kendall-Jackson. He‘ll pay most or all of his increased taxes by reducing his investments.

Less investment means less capital available to complement workers‘ abilities. The result is worker productivity being lower than otherwise and, hence, real wages being lower than otherwise.

The economics here isn‘t, as they say, rocket science. But it‘s true. Yet too many of the geniuses holding political power, as well as those issuing counsel to holders of political power, consistently ignore the economics here. These geniuses, with the insight of first-graders – and the ethics of thieves – imagine higher-taxed Bezos and Musk gorging themselves less on frivolous consumption goodies as ordinary people finally get more than the stale crumbs that happen to fall from the gilded terraces of billionaires‘ palaces.

It‘s such an economically and historically false image.

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