Socialists have one big weapon they want to use to correct many of the economic ills that they see. They want to use taxes as a way to redistribute money from billionaires to those they see as needier. If you see significant inequities in the distribution of income, that seems like a reasonable approach to take.
Confiscating the money of wealthy people and distributing it to the less wealthy creates a lot of complications. I want to focus today on the counterintuitive question: Who actually pays taxes?
For this article, I want to focus primarily on income taxes collected at both the state and federal levels.
Collecting taxes seems like the simplest, most straightforward, step in this whole process. The billionaire simply writes a big check payable to whatever level of government is collecting the taxes. It doesn’t, however, work quite that easily.
First, the billionaire must pay someone to prepare his tax returns. Generally, the wealthy have more complicated tax returns, which diverts a considerable amount of economic resources to a mostly unproductive process of completing tax returns.
Second, the government doesn’t just rely on the returns prepared by the taxpayer. They must hire people to review, audit, and actively collect taxes due.
Thus, between tax preparation and tax collection, a great deal of money is devoted to nonproductive processes.
The inefficiencies in the tax collection process all occur for a good cause, to aid the less fortunate citizens.
The next step in this process consists of providing various benefits to middle and low-income citizens (consumers). But, do those citizens get to determine on what to spend that money?
No, government bureaucrats acting with the authority of laws and regulations determine how the money collected in taxes gets redistributed. One can argue all day whether tax revenues actually get to the people who really need them.
In this process of redistribution, we cannot forget the government bureaucrats. Some of the tax money collected provides office space and salaries for these people. Thus, to the resources misallocated during tax collection, the government adds resources misallocated during the redistribution of those tax dollars.
We tend to accept that always costs something to help those in need. But, do they really benefit from that assistance?
Since socialists tend to be linear thinkers, they tend to overlook the feedbacks caused by the policies they implement.
By providing a whole group of consumers with money, for which they made little or no sacrifice, the redistribution process creates a whole new level of demand for various goods and services. That increased demand can come in a couple of forms. First, consumers now have the capacity to pay more for the services designated by the government bureaucrats — e.g., healthcare, education, food, etc. Second, because the government now pays for many of these more basic needs, these consumers can now pay for other products that they would have to bypass without having other expenses subsidized.
Because of the additional demand in various sectors of the economy, businesses (in this case, we’re worried about our billionaire) will tend to increase prices to acquire more plants and equipment to meet the demand or to increase their profit margins. Thus, the money received through income redistribution creates upward pressure on market prices.
This redistribution process creates additional harm to the long-term health of the economy. It causes a general shift from savings to consumption. This process may make people feel better off in the short term, but the long-term reduction in capital investment creates a long-term drag on future consumption.
Because the only purpose for economic activity consists of providing goods and services for consumers, and consumers decide what goods and services they prefer, all costs, including taxes, ultimately get paid by the consumer. Taxation may shift money from high-income earners to low-income earners in the short term. In the long-term, however, the burden of taxation really shifts to consumers.
This whole process places in motion a cycle that perpetuates consumption at the expense of savings. In the long run, this creates a drag on capital accumulation and the long-term increase in real consumption.
If you look at the areas of the most rapid price increases (healthcare, education, infrastructure construction, and food prices, for example), you will find the areas of the greatest government involvement in the redistribution of income. Taxation does not work as a vehicle for solving economic inequities — real or imagined.