Near the end of his treatise on economics, Ludwig von Mises wrote:
There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon “experts” and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake.
Very few are capable of contributing any consequential idea to the body of economic thought. But all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty.
Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen. (Mises, Human Action, pp. 874-875)
The most obvious illustration of Mises’ wisdom was the recent fiasco over Jonathan Gruber’s remarks about the Affordable Care Act (aka ObamaCare). In particular, Gruber referred to the deliberate “exploitation of the lack of economic understanding of the American voter” regarding (what economists call) tax incidence.
Gruber’s point was that removing the tax deductibility of health insurance premiums was economically comparable to imposing a surtax of 40% on so-called Cadillac insurance plans. Because the surtax will be levied on the health insurance companies, it met with less resistance than a policy of eliminating the tax code’s favorable treatment of employer-provided health plans. Yet to repeat, these policies are similar in their impact once the dust settles.
In an intro economics class, the professor would probably illustrate this distinction between the legal and economic incidence of a tax using a sales tax. For example, if the government imposes a $1/pack tax on cigarettes, does it matter whether the consumer pays the tax at the register, or if the store owner pays the tax? The answer is, it’s a wash. If you gave me a blackboard and some colored chalk, I could draw some nice graphs to show you, but intuitively: If the government slaps the tax on consumers, their demand for (legal) cigarettes goes down. Thus the pre-tax market price of a pack of cigarettes goes down; let’s say it drops by 20 cents. Thus, even though the consumer pays $1 on top to the government, on net the consumer is only paying 80 cents more per pack, while the store owner actually nets 20 cents less per pack. Therefore, for every $1 that the government gets in revenue from the sale of a pack of cigarettes, the smoker effectively pays 80 cents while the store owner pays 20 cents. (I’m just stopping the analysis at the store owner level; we could trace it to the wholesaler etc.)
But if the government instead levies the tax directly on the store owner, then the supply of cigarettes goes down, such that the market price of a pack rises by 80 cents. So for every $1 that the store owner sends the government per pack of cigarettes sold, the consumer ultimately pays 80 cents while the store owner really is only out 20 cents compared to the original scenario.
Thus, levying the tax on the customer versus the store owner is irrelevant; it is the relative elasticities of supply and demand in cigarettes that determines who bears the true burden of the new tax.
This type of reasoning applies not just to explicit taxes, but also to other ways in which the government imposes harms on sellers. For example, economist Steve Landsburg argues that to the extent that NYPD harassment of black market sellers is anticipated, it will drive up the price of illegal goods (like untaxed cigarettes) and allow sellers in this market to earn a higher income as a form of hazard pay. Thus the actions of the NYPD don’t affect just the recipients of the physical harm, but their customers and (possibly) workers in other industries who see an influx of competitors. Even something that seems to be about a non-economic issue (police brutality) also has economic implications worth noting.
Citizens can only understand the implications of various State policies if they first learn basic economics. Fortunately, this is very easy to do with all of the free online books, videos, and articles put out by such places as the Mises Institute, the Foundation for Economic Education, the Independent Institute, and the Fraser Institute, to name just four (for whom I do work, full disclosure).