Rothbard Bask
Well I guess I shouldn’t be surprised. Blogging something that could even be construed as a critique of Bob Wenzel’s take on something having to do with Austrian economics–even though you twice deny that that is what you are doing–is as reckless as peeing on an electric fence.
To refresh your memory, yesterday I wrote a post saying this:
Some people are asking me about Robert Wenzel’s take on Peter Schiff/Herman Cain on tax theory. I would have to sit and think through Rothbard’s argument about a consumption tax getting shifted back onto the incomes of land, labor, and capital (goods).
In the meantime, though, let me say…
To repeat, I am not here saying that Wenzel is wrong and Schiff/Cain are right. I’m just firing off a quick point that might move the ball forward for some of you.
What I was getting at in my post–and yes here I did explicitly disagree with Rothbard on one particular point–is that Rothbard somewhere challenged the standard supply-side critique of an income tax, on the grounds that it “discourages savings.” This is a standard supply-side argument, in favor of a consumption tax as opposed to an income tax.
So Rothbard had criticized this standard argument, on the grounds that the government shouldn’t be encouraging people to save more or less; people’s time preferences should determine that. Furthermore, a tax on consumption will discourage savings too, because after all you save today, in order to be able to consume in the future. So that consumption tax that will hit you in the future, will discourage your savings today.
That is the argument from Rothbard I was criticizing. In response, Wenzel didn’t get that distinction, and instead thinks I was attacking the claim about consumption taxes being shifted onto productive factors (the claim I specifically said I would have to think about).
So now for the Rothbard bask: Can someone go find me Rothbard saying that an income tax doesn’t discourage savings any more than a consumption tax? I think it’s probably in Man, Economy, and State, but it’s possible I read it in a shorter essay Rothbard wrote somewhere.
Either way, here’s an interesting take-away from Wenzel’s interpretation:
Rothbard’s view is not that the consumption tax makes consumers poorer, but that the tax is shifted backward to land and labor. Thus, there is nothing in Rothbard’s view about a consumer deciding ” in which time period to distribute the blow.” There is no blow to the consumer.
Are you Wenzel fans sure you want to go with him on this one? Now a consumption tax doesn’t hurt the consumer at all? So retired people (who no longer work), who have all their assets in gold bonds or actual cash* (so they won’t be hurt by declining corporate earnings or land rents) will be unaffected if Cain institutes a 9%, or for that matter a 99%, national sales tax? Do you Wenzel fans really think that can possibly be correct? If so, Cain should incorporate that into his schtick.
(NOTE: I am NOT here saying that Rothbard said a consumption tax doesn’t hurt consumers at all. As I said all along, I need to go study that argument again, because there are a lot of moving parts. I’m saying that Wenzel’s quick reaction to my post, implies such an absurdity.)
* EDIT: I originally had “gold” as the asset, but changed it to “bonds or actual cash” because the retired people would get hit with the national sales tax (perhaps) when selling off their gold holdings. Now I’m waiting for a new Wenzel post: “Murphy says holding US fiat dollars a better investment than gold!!”
I don’t think it was Rothbard, but someone somewhere said don’t use gold bond for an actual rash.
Rick Hull FTW.
\o/
I’d have settled for a raspberry.
“Blogging something that could even be construed as a critique of Bob Wenzel’s take on something having to do with Austrian economics–even though you twice deny that that is what you are doing–is as reckless as peeing on an electric fence.”
Rarely do I read economic blogs and laugh out loud. This happens to be an exception. It seems like you have the lead with Tom Woods and Lew Rockwell coming in a close 2nd and 3rd for funniest economic posts.
Yes, I must agree that Wenzel’s statement that “there is no blow to the consumer” was wrong. It is my opinion that different types of taxation do have different effects over time and create different distortions depending upon the type of taxation. As far as Rothbard’s argument with regard to consumption taxes discouraging savings just as income taxes do, I’d have to read what he said (if I can find it). But, just mentally tinkering with ideas like the elasticity of demand, I can definitely see how a consumption tax would hurt the consumer. I mean, it is a tax on ALL consumption, how can it not hurt consumers?
Can you check MES, chapter 12, section 8A? In the PDF, there is a discussion that starts at the bottom of page 917 starting with “Some economists maintain that income taxation reduces savings and investment in society in yet a third way…”
917 is the number scribbled on the PDF page (the number in the book). Can’t tell what “file page” it’s on. Acrobat says (981 of 1504).
Marris,
Rothbard mentions this point there, but the section Josh mentions (below) in Power & Market elaborates the point much more fully.
Bob,
In Power and Market, Ch. 3, D., (5.), MR states that a consumption tax will resolve into an income tax, but at a lower rate. He states, “…the same rate in a consumption tax has the effect of a lower rate of income tax. The tax burden on society and the market is lower.”
If I wasn’t sitting in my car at a gas station, working off of my Kindle and cell phone, I’d do a bit more of a search for you, but I’m afraid you’re out of luck at the moment.
-Josh
I’ll follow up with Josh. Sorry to be a wiener, but it’s Ch.4, not Ch.3… then again I have the book right here.
I think Rothbard’s argument is that a tax just on consumption, if the tax rate is the same as the tax rate on income, will result in lower taxes, and higher net income for the individual. The distribution will not be fully born by a reduction in consumption though. Because future consumption will also be taxed, the consumption tax doesn’t encourage savings. So there’s no reason to assume a person’s savings rate from income would change. Thus, in Rothbard’s example (pg. 1182 in the 2nd edition) shows that a consumption tax is paid for out of consumption and savings, not just consumption.
HA! Thats great stuff bob. Wenzel needs to settle down. I really like both of your blogs, and I love the debate, but really Wenzel has the most misleading statements sometimes.