On Monday, I wrote about the man who can’t be taxed. There were many comments, some confused, some insightful, and (at least) one brilliant. Let me highlight that brilliant comment, then beat the point to death a little, and then draw a large moral.
Our commenter Ken B invited us to imagine a dead man, with, say $84,000,000 in his bank account (and a will that requires this bank account to be maintained forever). And let’s suppose the government confiscates, say 82 of those 84 millions, thereby allowing it to reduce other people’s current or future taxes —making those people richer. They buy more stuff. They eat more, they burn more gas, they occupy more space. Where did that stuff come from?
(Alternatively, instead of lowering someone else’s taxes, the government takes the opportunity to spend more, in which case the government claims more stuff. We still have to ask where it comes from.)
It certainly did not come from the dead man, who was eating nothing, burning no gas, and occupying no more space than he continues to occupy. Instead, somebody else must decide to consume less.
But initially nobody wants to consume less. So people, collectively, are trying to consume more stuff than is available. This excess demand for stuff pushes up prices and/or interest rates until people are willing to cut their consumption.
There is no meaningful sense in which the dead man paid the tax. Instead, the tax burden is borne by those people who were hurt by rising prices and/or interest rates.
Now Robert Kendrick, who has 84 million dollars in the bank and spends effectively zero, is (for these purposes) the economic equivalent of a dead man — he can’t consume (much) less than he’s already consuming. So if you take his money and use it to reduce some people’s taxes (or to increase government spending), then you’ve surely pushed the cost off on to some other people. Your accountant might tell you you’ve taxed Mr. Kendrick, but your economist will tell you that the actual tax burden fell on some entirely different people.
Who are the losers here? If Mr Kendrick has a nephew who plans to inherit and blow through the 84 million, he’s certainly prominent among the losers. But even if Mr Kendrick has no heirs — even if he somehow manages to live forever (continuing to maintain a minimum level of consumption), the someone else bears the burden of the tax.
Here is the larger moral: Money is not wealth. The great mistake is to think you’ve understood a transaction just because you know where the money went. That will lead you to even sillier mistakes, like thinking that if the government comes into an $82 million windfall, it can use that money to buy goods, and the goods don’t have to come from anywhere. This confusion — the idea that money can substitute for goods — comes up often in economic policy discussions, and it inevitably spawns nonsense. The same confusion underlies the mercantilist fallacy, which economists have recognized as exactly that — a fallacy — for over 200 years. It’s a good one to be on guard against.