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Rothbard vs. the FairTax

Posted by cavalier973 on Monday, December 22, 2008 12:37:39 PM

 
Okay, he's not directly critiquing the FairTax as such, but a general retail sales tax, which the FairTax is a form of.  Overall, it is interesting and helpful information, but Mr. Rothbard has not convinced me to abandon the FairTax.  In fact, he at first gives a pretty good argument for a general sales tax (as an alternative to the various types of consumption tax proposals), before he then denounces it:
 
"The third type of consumption tax is the familiar percentage tax on retail sales. Of the various forms of consumption tax, the sales tax surely has the great advantage, for most of us, of eliminating the despotic power of the government over the life of every individual, as in the income tax, or over each business firm, as in the VAT. It would not distort the production structure as would the VAT, and it would not skew individual preferences as would specific excise taxes."
 
And speaking of the income tax, by the way, he says this:
 
"A second insuperable problem with an economist's recommending any form of tax from the alleged point of view of the taxee, is that the taxpayer may well have particular subjective evaluations of the form of tax, apart from the total amount levied. Even if the total revenue extracted from him is the same for tax A and tax B, he may have very different subjective evaluations of the two taxing processes. Let us return, for example, to our case of the income as compared to an excise tax. Income taxes are collected in the course of a coercive and even brutal examination of virtually every aspect of every taxpayer's life by the all-seeing, all-powerful Internal Revenue Service. Each taxpayer, furthermore, is obliged by law to keep accurate records of his income and deductions, and then, painstakingly and truthfully, to fill out and submit the very forms that will tend to incriminate him into tax liability. An excise tax, say on whiskey or on movie admissions, will intrude directly on no one's life and income, but only into the sales of the movie theater or liquor store. I venture to judge that, in evaluating the "superiority" or "inferiority" of different modes of taxation, even the most determined imbiber or moviegoer would cheerfully pay far higher prices for whiskey or movies than neoclassical economists contemplate, in order to avoid the long arm of the IRS."
 
But Mr. Rothbard does not like a general sales tax.  (Now, again, Mr. Rothbard is not critiquing the FairTax specifically;  his main target in terms of a general consumption tax seems to be a proposal by an Irving Fisher; a proposal that actually sounds worse than the current system.)  He ultimately argues that retail firms would not be able to pass on the increase in price from the added sales tax, but would rather have to absorb it, since the supply of goods has not changed overnight, and people's time preferences regarding saving and consumption has also not changed.  He says:
 
"Put another way: the levy of a sales tax has not changed the stock already available to the consumers; that stock has already been produced. Demand curves have not changed, and there is no reason for them to do so. Since supply and demand have not changed, neither will price. Or, looking at the situation from the point of the demand and supply of money, which help determine general price levels, the supply of money has remained as given, and there is also no reason to assume a change in the demand for cash balances either. Hence, prices will remain the same."
 
The result of a sales tax, therefore, is the dissolution of retail firms who cannot charge more for their wares; followed up by a slowing of the economy and death! Death! DEATH! I SAY!  Well, not that extreme, I guess.
But he concludes that a general sales tax would devolve, ultimately, onto the incomes of workers and landlords, who have to accept lower wages and rents because of the general economic decline (I guess).
He writes:

"The general stress on forward shifting, and neglect of backward-shifting, in economics, is due to the disregard of the Austrian theory of value, and its insight that market price is determined only by the interaction of an already produced stock, with the subjective utilities and demand schedules of consumers for that stock."
 

Forward shifting, I take it, means that the cost of the sales tax is laid on consumers as they purchase items.  Backward-shifting means that the cost, again, is borne by the retail firms, and ultimately their employees and the landlords who rent the retail outlets to the firms.

But it seems to me that, since the income tax is no longer reducing people's income, that the supply of money available to each individual is increased; as a result, assuming that the "time preferences" of individuals do not change, the total supply of money in the marketplace is increased.
 
Example:  an individual earns $100,000 per year, and has a time preference of 10% for savings.  Under the current tax code, assume that he pays a total of 30% income tax (that includes the costs of compliance).  So he pays $30,000 in taxes, leaving him $70,000.  He saves $7,000 and spends $63,000, according to his time preference.  Now, with the FairTax, he keeps all $100,000.  Now he saves $10,000 and spends $90,000.  That's $27,000 more money being spent on goods and services (not to mention $10,000 going into "future consumption" through savings).
Now, the gentleman in question was used to paying $63,000 for all the goods and services he desired.  Let's add the sales tax on those goods and services: $63,000 x 30% (the tax exclusive version of the FairTax rate) = $18,900, which is less than the amount that the gentleman is now able to keep in consumption money ($27,000) since he is no longer paying the income tax. If retailers were already charging the top market price for its wares, and then had to charge the sales tax on top of it, our gentleman has plenty, with a little left over, to pay for the same amount of products even with the sales tax added on.
 
In fact, thinking over this example, the danger appears to be a general increase in prices, since we now have more dollars chasing the same amount of goods.
 
But then we have to take into account that firms themselves are no longer burdened with an income tax, and with the costs of compliance with that income tax.  I could be wrong, but whenever a firm lowers its costs generally, it seems that the firm would seek to increase market share by also lowering the prices for its products.  Or, alternatively, it could seek to keep the same price, but improve its product in some way by incurring greater costs in other places (i.e. the pizza parlor negotiates a lower rent, so it can try to gain market share against other pizza parlors by either charging less for its current pizza, or by adding more ingredients, changing to a better-tasting sauce, etc.)
 
As an aside, Mr. Rothbard sneers at the current politico-economic divisions of "rich, middle class, and poor"; instead, he favors a division of "tax-gatherers" and "tax-consumers".  The first group is NOT the IRS, depite the label:
 
"Those who pay taxes to the State, be they wealthy, middle class or poor, are certainly on net, a different set of people than those wealthy, middle-class, or poor, who receive money from State coffers, which notably includes politicians and bureaucrats as well as those who receive favors from these members of the State apparatus."
 
What Mr. Rothbard means is that the "tax-gatherers" have their incomes sheared in order to provide income to the tax-consumers.  The tax gatherers are producers, entrepreneurs, laborers, business firms, that seek to profit by producing goods and services to the market.  The second group are non-productive types, mainly government and bureaucracies, but also including "welfare queens" who forcibly extract resources from the first group in order to consume.   This seems like a valid distinction, but the problem is that just about all of us are tainted, to some degree, with the "tax-consumer" status.  The recent "Bailouts" come to mind, but also things like Earned Income Tax Credit, Mortgage Interest deduction.  And the current tax code is riddled with provisions to dole out favors to people and firms from the State apparatus.
 
Mr. Rothbard offers no alternative plan to the current tax system, but simply calls for lowered taxing and spending.  This is a great idea, but somehow I doubt that the current Byzantine system lends itself to a general cry for lowering taxes and spending, since a majority of the populace do not pay taxes (or the compliance costs) other than the FICA (and inflation, of course), and indeed, as partial "tax-consumers" get a piece of the governmentally stolen pie.
 
Our current tax system is geared as much toward social engineering and behavioral control as it is to collecting taxes.   The FairTax, however, is about financing the government, which is what tax systems are supposed to do.
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A very interesting article about Reagan

Posted by cavalier973 on Saturday, December 20, 2008 9:15:50 PM
You don't hear this sort of criticism of Reaganomics from a free market advocate.  By the way, this article was written in 1987.  According to the heading, this is an edited version of the original article:
 
 
Tags: reaganomics  
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Can I just say that Carter Burwell is a musical genius?

Posted by cavalier973 on Friday, December 12, 2008 10:56:26 PM
His website: http://www.carterburwell.com/main/home.shtml
 
I used to think that John Williams was the absolute best.  But if you buy one of his CDs, you find that all his music starts to sound the same.
 
Not so, Mr. Burwell.
Check out the "Projects" on the menu bar.  "Raising Arizona" had some of the most interesting tunes of any movie.
Tags: Music  
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It's a Wonderful Life, part 2--Mr. Potter is not the good guy

Posted by cavalier973 on Sunday, December 07, 2008 12:05:24 AM
Reading on the other side of the aisle, you find people of the Libertarian persuasion who think that Mr. Potter is the good guy of the story.  (http://blog.mises.org/archives/007578.asp).
 
This could not be further from the truth, and the reason should be obvious a little over halfway through the movie.  All through the movie, we've seen Potter as a cranky capitalist;  he is wealthy, but not necessarily a bad guy, and apparently wants to merely protect his investments from the starry-eyed Baileys and their crusade to get everyone into his own home.  But then the crucial scene occurs, in which Potter keeps the money accidently folded into his newspaper.  This is not the action of an honest businessman.  The Libertarians should see this outright, and start to question their assumptions about Potter being a man who obtains wealth as he "offers goods and services that people demand at prices they are willing and able to pay".  When the conventional image of Potter as an arch-capitalist is maintained, the inferences of the movie's message is warped.
 
It is conventionally assumed that the movie is about cold, laissez-faire capitalism vs good-hearted humanity.  Potter the arch-capitalist versus George Bailey the little guy, who is only able to defeat Potter because he is mystically protected through his goodness to his fellow-man.
 
But Potter, upon examination, is clearly not a market entrepreneur.  The theft of the money should be proof enough of that statement, and provides a key insight into his motivations and mode of operating.  But other clues to his real character are also demonstrated throughout the movie: he lives sumptuously; much too sumptuously for someone who is a first-generation rich entrepreneur. He is politically connected, putting congressmen on hold while he discusses business.  He displays a clear sense of entitlement and superiority over the others in the town.  Mr. Potter's "business" is apparently managing his investments.  We never see him overseeing a factory or managing a department store; we only see him in the bank after he bought it out during the Panic.  In other words, Mr. Potter clearly inherited his wealth, and spends his time trying to protect his wealth through acquiring monopoly power (anyone with a brain could explain why such a goal is futile, but Potter is not as bright as one might think; just sneaky and opportunistic).  Although it's not shown in the movie, logic would dictate that Potter uses his political influence in an attempt to attain this goal.  But there's a problem with his plans--the Bailey Building & Loan Association, which offers customers an alternative product to Potter's rental houses.
 
The Bailey Building & Loan Association can beat Mr. Potter because it has talented management, first Peter Bailey, then his son George.  Both of them know how to cut costs effectively enough to allow them to sell houses worth twice what it cost them to build.  They have a gift for dealing with customers, and are able to see and seize opportunities that Potter can't quite recognize.  Potter scoffs that "if you shoot pool with the employees [of the building & loan], you can get a loan", but Banking at that time was a much more personal business than it is today with Equifax and the like.  You had to know the potential borrower and be a good enough judge of character to predict he will repay the loan.  In his book "The Economics and Politics of Race", Dr. Thomas Sowell describes different ethnic groups and their work habits as they immigrated to America.  The Irish were particularly good at Banking, because they were good judges of character (they were also good at politics, for similar reasons).  The Baileys apparently have this gift of judgement that Potter lacks, so they are able to capture loan business that Potter overlooks (after he becomes a Banker).
 
A second reason that Libertarians disapprove of George Bailey is that he practices Fractional Reserve Banking.  This is when a bank takes demand deposits (checking accounts), and loans all but a small reserve of the deposit to borrowers.  Demand deposits in this case would also include savings accounts that do not have a specified time limit before withdrawals can be made.  In other words, you deposit your paycheck into your bank account, but instead of the bank putting all of your paycheck into the vault for your exclusive use, a large percentage is loaned out to others.  So two people now have a claim to the same dollars--you, as the original and rightful owner, and the borrower, who was lent your money and is now using it for whatever reason.  This practice originated in the Middle Ages by English Goldsmiths (look it up), and is how the banking system is handled today.  Before FDR, when times got tough and people proceeded to withdraw most or all of their money from their accounts, the banks got caught without enough money in the vaults to hand out to all the depositors; the result was a run on the bank (similar to the scene on George's wedding day), and usually meant that the bank went, well, bankrupt.  Today, the Federal Government guarantees everyone's bank account up to $100,000, and we no longer (as yet) have bank runs.
 
On the surface, it appears that George's Building & Loan is engaging in Fractional Reserve Banking.  But then we have a curious line in the middle of the scene:  George tells Randall that Randall must sign a paper, and that he could have his money in 60 days.  He says later that that was the original agreement.  But the key phrase I'm talking about is when George tells Randall that the 60 day rule was one that Randall agreed to when he "bought his shares."  See here: http://www.encyclopedia.chicagohistory.org/pages/1746.html  and here: http://www.answers.com/topic/building-and-loan-associations
 
A Building & Loan Association is not a bank, per se.  The "deposits" that it accepts are actually purchases of shares in the association.  And the borrowers are those same people who bought shares in the association.  The point of this is that when the members bought shares in the Bailey Building & Loan, they apparently signed an agreement that they had to wait 60 days before they could withdraw money from their accounts.  This proviso of course might be waived at times to facilitate the needs of members, or its "withdrawals" might actually be made in the form of loans which are then repaid through the redemption of the member's shares.  In any case, the depositors know up front that they will not have immediate access to the money they deposit into the B&L; they agree to the terms that their money is not being warehoused in the building & loan, but rather is being lent out to other members.  A bank, on the other hand, has an implicit agreement with its depositors that it will act as more or less a warehouse for their money.  Instead of storing the money, however, the bank lends it out (or most of it).  You're still writing checks that draw money from your account, but so is someone else--the borrower.  The Fractional Reserve Banking System in effect creates money that wasn't there before--one of the main reasons for inflation.
 
The third thing that Libertarians dislike about IAWL derives from the Objectivist Philosophy many espouse, which determines that self-sacrificial giving is an evil act.  In this case, George is to be depised for giving up his dreams and instead continuing the legacy business of his father, and giving his time and money to others in the town, without regard to his own interests.  In a sense, they are right; think of all the people George might have helped and benefited had he pursued his intentions of becoming a great architect/builder.  Think of Sam Wainwright and his ability to provide jobs for the unemployed in Bedford Falls by locating a factory there; a decision he could make because he left Bedford Falls to pursue "success".  (While George was the impetus for Sam's decision, there's no reason that someone else of Sam's acquaintance could not have given the same recommendation, had George already left the town.)
 
On the other hand, in economics it is said that "firms maximize profit, while individuals maximize utility", and while we are given a pretty intimate look into George Bailey's life, we can't see everything; we can't read his mind or soul and say definitely that he would really much prefer to leave Bedford Falls.  He is assuredly conflicted with his decision; he is bitter much of the time and complains a lot; but he stays.  What's the phrase?  "Actions speak louder than words"?  Libertarians attribute George's being "stuck" in Bedford Falls to others' successful attempts to tie him down (especially that of his wife, Mary).  It seems to me that George never really, deep down, wanted to go, or else he would have found a way out.  He derived too much utility from his job at the B&L, from establishing his family, from beating Potter at every turn (until Potter cheated by stealing his money).
 
One last word about Potter's "non-punishment" at the end of the movie.  Capra said that the only thing he could think of to punish Potter was to take away his money, and that he could think of no credible way to do that in the last few minutes of the movie.  But Potter's punishment was the worst of all: he was excluded from the joyous gathering in the Bailey home.  This idea reflects my view of eternal reward and punishment.  In my opinion, this will be the bitterest torture of hell: having seen the infinite God in His extreme glory, realizing what fulfillment it brings to stand in His presence, knowing that spending an eternity discussing and fellowshipping and rejoicing with God was what you were searching for all your life, and then being excluded from ever even seeing Him again, for eternity.
 
 
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It's a Wonderful Life, part 1--it's not a liberal movie

Posted by cavalier973 on Saturday, December 06, 2008 10:16:34 PM
The above link is to a liberal blog whose author makes the claim that "It's a Wonderful Life" is a movie based on liberal philosophy.  This is an exquisite response from a scholar and a gentleman:
 
"matt621 said:
'Just finished watching it for the ten billionth time on Christmas Eve, and I don't know how anybody could argue that it isn't one of the most liberal movies ever.'

In a year featuring anti-war box-office smashes like “In the Valley of Elah,” “Rendition,” “Lions for Lambs,” and “Redacted,” that’s a pretty bold statement.

It’s either a tribute to Oliver’s ignorance of the world or a testament to his sadly warped view of it, that he can make such an absolute statement like that and expect it to stand up.

Potter as Dick Cheney, the prototype of moviehouse eeeeeeeeevil. Personally, I prefer Sydney Greenstreet in The Maltese Falcon, but to each his own.

What’s missing in the partisan myopia, is that the generation-long battle between the Bailey family and Henry Potter is not a battle between liberal and conservative but between good and evil.

It’s no surprise that Oliver’s Army would miss the distinction; good and evil are apparently mere quaint abstractions in their eyes. Except when a political distinction can be inserted – then, according to their particularly twisted take, we have the wholesome goodness of liberalism and the irredeemable evil of conservatism. And may Mother Earth rain volcanic ash upon your house should you ever confuse the two.

But is that what IAWL shows us? That Oliver’s Neanderthal grunting of “Liberals Good, Conservatives Bad!” is but a shadow of Frank Capra’s 1946 prescience?

Not at all.

As in all of life, the tale is never as simple as the “nuanced” liberals would have us believe. There’s barely a lick of liberal philosophy to be found in this film. It is only Oliver’s twisted vision, equating apparent good to liberal principles and apparent evil to conservative principles, which allows him to argue such a thing at all.

Is it a liberal film? Well it might be…

If we believe that the Building and Loan would go to the government for a bailout after Uncle Billy’s blunder…

If we agree that Freddie Othello is justified in opening the gym floor swimming pool to give George and Mary a dunking because it’s not his fault he’s a crushing bore, George stole his girl! Freddie was just an innocent victim…

If we agree that George Bailey’s ultimate happiness depended on his personal fulfillment and self-esteem, and not on grasping that which had always been right in front of him, if only he had the wit to reach out and take it…

If we agree that none of George’s problems were his fault, but instead were unpreventable, inevitable, insolvable, due to “circumstances beyond his control…”

If we understand that Pottersville’s main drag is a precise re-creation of the means by which government keeps the poor from improving their lot by catering to the lowest common denominator: Dancing girls, lottery tickets, pawnshops, and plenty of booze to dull the pain; all heavily taxed, no doubt, to keep the government coffers overflowing, if not simply to redistribute Potter’s unchecked wealth…

Maybe Oliver is right. That’s what you get with liberal government - the illusion that life is supposed to be always fair and always happy. If you hold to those peculiar definitions of “fair” and “happy.”

No, this is not a liberal film. What IAWL is, is a film that celebrates several things: the benefits of foresight, hard work, saving, self-reliance, perseverance and thinking of the other guy first; the notion that happiness is not a destination to be reached just over the next hill but a flower always blooming beside the road, just waiting to be picked and enjoyed; and finally, that divine intervention and the hand of God are real.

Not precisely aligned with the traditional liberal canon, these.

What do we see in Bedford Falls that causes us to celebrate liberal philosophies?

Clean, decent, affordable government housing! Oh, wait…Bailey Park was filled with houses built with funding from a small business, not by the government.

Government subsidized work programs! No… the Baileys owned their business and ran it well without government intervention… Gower’s Drugstore & Emporium… Martini’s Bar… where is the hand of the state in the success of these and all the other small businesses in Bedford Falls?

Perhaps the separation of church and state! Well, yes… because the film opens with a montage of prayer, but not a single government official can be heard. Only prayerful concern lifted for a man who’s reached the end of his rope, by a town full of all the souls who have reaped the benefit of that man’s goodness and generosity for a generation. I believe Oliver would call these folks, as he has in the past, “religious nuts.” Certainly they are not the preferred poster children for Oliver’s liberal dystopia.

What about George Bailey himself, liberal crusader for truth and justice? Hardly! Is it by the power and benevolence of the government that George acts and gives and sacrifices to save his brother’s life? No. To prevent Emil Gower’s life-threatening mistake? No. For the Building and Loan after his father’s death? No. So that his brother can go to college? No. So that selfish b-----d Harry can pursue his own marriage and his own dreams? No.

Is it with the power of the government, or by the sacrifice of his own honeymoon stake, that he again saves the Building and Loan from Potter’s hands?

Is it the power of government, or George’s own position as head of the Building and Loan, which ushered in a period of growth, prosperity and personal gain for Bedford Falls which so galled Potter that he finally was reduced to offering George a job in an effort to end the Building and Loan’s encroachment on the Potter empire?

Was it government regulation, or free-market entrepreneurial capitalism, that allowed the Building and Loan and Bailey Park to thrive?

George’s self-reliance and self-determination guided him in every case, in every crisis, with never an expectation that a New Deal program or a government dole, or even the person he helped would come back around to bail him out.

Even Ma Bailey, without husband Peter, never-existing son George, or long-deceased son Harry, made her own way. She converted her home to a boarding house. Where is the government to provide her cushion?

And was George himself a religious man? The evidence is unclear. In Martini’s bar, just before the final thread snaps, a desperate George Bailey, about to be arrested, picks up the phone and calls the government to bail him out, right?

Nope. Like a universe full of desperate men before and since, when there is no other help to be had, whom does he seek?

“God...Oh, God...Dear Father in Heaven, I'm not a praying man, but if you're up there, and you can hear me, show me the way. I'm at the end of my rope. I... Show me the way, God.”

George admits he’s not a praying man… in the middle of a prayer. We learn from Joseph, the narrator (an angel in heaven, but surely that’s a mere cinematic storytelling device, not a true representation like the evil conservative Henry Potter!), that on V-E day, George wept and prayed, and on V-J Day, he wept and prayed again.

Turning to God before the government? A liberal champion like George Bailey? Just another atheist in another foxhole.

Oliver, what movie are you watching?

But what do you gain with conservative financial principles like planning and foresight, with a plan to save money and avoid debt?

If you want to, you can put off going to college for four years, work, save and earn enough to pay for college without borrowing. Or send your brother if your father’s untimely death leaves you to take over the family business.

If you plan, work and save, you can gather enough cash to go on a lavish honeymoon and not have a crushing debt follow you home. Or you can save your family’s livelihood.

Because, damn, you just can’t plan for these sorts of disasters in life, can you? Unless, of course, you do.

If you save money, if you exercise foresight and planning, you can buy a big, old, drafty, rundown mansion and spend years slowly painting and hanging new wallpaper and building a showplace (eventually you might even be able to fix the finial atop the newel post at the bottom of the stairs), and not risk losing it to the bank. Wow, that’s a lesson that endures, isn’t it?

What about happiness? Was George ever going to find happiness outside Bedford Falls? Why should he? It took him 25 years to see it, but he finally realized everything he had overlooked – a devoted wife and loving family, a war-hero brother who after all his accomplishments understood that his big brother was a better man than he, a town full of friends and people who loved and respected him with such feeling that they emptied their collective coffers for him in a time of need.

It was not what he did or didn’t do, not what he had or didn’t have, not who he knew or didn’t know that made George Bailey a happy man; it was nothing more than who he was, a man of strength, character and values. A man who in the final moments saw how the little efforts he made had the greatest effect, saw not the world he wished for but the world he lived in. He finally understood that his happiness had been there underfoot all the time, and his endlessly delayed chase for the end of the rainbow would have only taken him farther from it.

And of course, the framing device in the film, opening with a town’s prayers for a lost soul, and ending with a redemptive miracle that not only saves a man’s eternal soul but earns an apprentice angel his wings?

Have you been touched by his noodly appendage? George Bailey certainly hasn’t.

George Bailey, a liberal?

I must admit he did have that irritating habit of wishing for a million dollars every time he walked into Gower’s drugstore. That’s a pretty liberal trait, but George also had that annoying work ethic and habit of saving that betrays the liberal faith.

But, George Bailey, a liberal?

He jumped into a river to save a drowning man. Would Ted Kennedy have done the same?

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