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May 13th, 2013 
Peter Nolan by
Walter E. Williams
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by Walter E. Williams: Academic
Cesspools
Suppose you
buy a gallon of gas for $3. How much did it cost you? You say, “Williams,
that’s a silly question. It cost $3.” That’s where you’re mistaken,
because there’s a difference between price and cost. To prove that
price and cost are not the same, consider the following. Suppose
you live and work in New York City and routinely pay $15 for a haircut.
Imagine you were told that there’s a barber in Boise, Idaho, who
can give you the identical haircut for just $5. Would you start
going to the Boise barber? I’m betting you’d answer no because even
though the price is cheaper, the cost is greater.
We might think
of price as the money that’s actually given in exchange for the
transfer of ownership. When you purchased the gallon of gas, you
simply transferred your ownership of $3. What the gas cost you is
a different matter. One way to determine the cost of a gallon of
gas is to ask yourself what sacrifice you had to make in order to
have $3 to buy it. Say that your annual salary is $75,000. Your
total federal income tax, state income tax, local taxes and Social
Security and Medicare taxes come to about 35 percent of your salary.
That means that in order to purchase the $3 gallon of gas required
that you earned about $4.60 in order to have $3 after taxes. That
means a gallon of gas costs you $4.60 worth of sacrifice. But that’s
not so costly as it is to a richer person – for example, someone
earning a yearly salary of $500,000. He has to earn more than $5
before taxes in order to have $3 after taxes to purchase gas.
If taxes only
concealed hidden costs of what we buy, we’d be lucky, but taxes
are destructive in another hidden way. Suppose I want to hire you
to repair my computer. Having the work done is worth $200 to me,
and performing the work is worth $200 to you. The transaction occurs
because we have a meeting of the minds. Suppose Congress imposes
a 30 percent income tax on you. That means that if you repaired
my computer, you would receive not $200, what it was worth to you
to do the job, but instead $140 after taxes. You might say the heck
with repairing my computer; spending time with your family is worth
more than $140.
You might then
offer that you’d do the job if I paid you $283. That way, your after-tax
earnings would be $200 – what doing the job is worth to you. There’s
a problem. The repair job was worth $200 to me, not $283. So it’s
my turn to say the heck with it.
This
simple example demonstrates that one effect of taxes is that of
destroying transactions and hence jobs. But politicians have what
economists call a zero-elasticity vision of the world. In other
words, they’re fool enough to believe that people will behave after
taxes are levied just as they behaved before and that the only effect
of a tax is to bring in more revenue. Of course, a more flattering
assessment is that politicians are not fools and know that their
actions destroy transactions and hence jobs but they don’t give
a damn and only care about revenue.
Here’s a question:
Would you and I, as well as our nation, be better off if you repaired
my computer and I gave you $200 in cash and we agreed not to report
the transaction to the agents of Congress? I’d answer yes and no.
Yes, because there’d be more transactions, more jobs and greater
wealth. No, because we’d be criminals.
Taxes are necessary
to fund the constitutionally mandated functions of the federal government.
If Congress spent according to its authority under Article 1, Section
8 of our Constitution, taxes wouldn’t be any more than 5 percent
of the gross domestic product, as it was between 1787 and 1920,
as opposed to today’s 20 percent.
May
13, 2013
Walter
E. Williams is the John M. Olin distinguished professor of economics
at George Mason University, and a nationally syndicated columnist.
To find out more about Walter E. Williams and read features by other
Creators Syndicate columnists and cartoonists, visit the Creators
Syndicate web page.
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© 2013 Creators Syndicate, Inc.
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Source Article from http://lewrockwell.com/williams-w/w-williams165.html
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