How To Fix America's Health Care System

Problems with health care in America are not failures of voluntary market exchange; they are failures of government interference with voluntary market exchange. To fix the problems, eliminate government interference with voluntary exchange in health care markets.

1.    Eliminate involvement of employers in health care altogether; do this simply by removing from federal and state tax codes all tax implications of health care goods and services, for both businesses and individuals. Remove all tax deductions, tax credits, and tax preferences of any kind that involve health care services or health insurance premiums; remove all interactions between health care and the tax code.

2.    Eliminate supply-side restrictions on health care.

a.    Rely entirely on private voluntary exchange on the supply side of health care markets.

b.    Eliminate barriers to entry for hospitals, clinics, dental schools, nurse training schools, and medical schools, including "certificates of need," and government imposed restrictions on health care training organizations.

c.    Eliminate municipal, tax financed, government-subsidized, tax advantaged hospitals and clinics.

d.    Allow consumers to decide what levels of health care training are sufficient for their health care needs.

                                 i.         Eliminate legal restrictions on health care providers at all levels.

                               ii.         Eliminate government licensure requirements for all levels of health care providers

                             iii.         Promote private certification, like we see for Certified Public Accountants (CPA), Certified Financial Planners (CFP), and Civil Engineering Certification (CEC). Neither federal nor state governments would play a role in certification.

e.    Rely on wide-spread information dissemination about individual health care providers, hospitals, and clinics — similar to nutritional content on food packages, Yelp for restaurant reviews, and Consumer Reports for goods and services.

f.     Eliminate 3^rd party payer models that have removed price competition from health care.

g.    Eliminate Medicare, Medicaid, Veterans Administration hospitals, and all other health care programs run by government.

3.    Eliminate state boundaries for health insurance; allow nationwide competition for whatever health care insurance markets emerge. Eliminate restrictions of any kind on pricing and characteristics of health insurance products.

4.    Give low-income individuals and families means-tested health care vouchers to purchase routine health care, similar to the SNAP program. Pay for vouchers from general tax revenue.

5.    Eliminate patents for pharmaceuticals. Rely on academic research to develop new drugs, as we largely already do. Academic research is highly motivated by institutional prestige, not sales of drugs. We have no evidence whatsoever that eliminating patents on drugs would reduce research and production for new efficacious drugs in America, notwithstanding loud protests to the contrary from the rent-seeking big pharma corporations.

     Implementing the 5-point plan outlined above will lead to the following benefits for people in America:

A.  Creation of market prices in health care. As noted by professor Alex Tabarrok, of George Mason University, a market price is "a signal wrapped up in an incentive" for both producers and consumers. Without market prices, producers and consumers have no way to maximize economic efficiency.

B.   Reduction in the cost of health care across the board, due to increased supply and reduced demand for health care services.

C.   Increased supply of health care services, due to removing supply-side restrictions put in place by government operatives who have catered to rent-seeking health care providers.

D.  Greatly reduced wait times in doctors’ offices and hospital emergency rooms, as health care providers begin competing on price and quality of service.

E.   Much greater diversification of health care delivery models, such as online diagnosis and service, walk in lab testing, online diagnosis services, quick-service health care clinics, and other business models that no one has yet even imagined (http://reason.com/archives/2014/09/30/supply-side-health-care-reform ).

F.    Greatly reduced cost for routine health care services that providers with much less training than an MD can provide with great competence.

G.  Lowest feasible cost for health care services across the full range of health care services.

H.  The absence of government and its operatives from health care markets, thereby improving economic efficiency and equity across the board.

I.     Elimination of the deadweight costs created by subsidies, price controls, and supply-side restrictions. A greater number of people will receive a greater quantity of health care with a higher quality and benefit to individuals, at the lowest possible cost.

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10 Questions and Answers about Health Care

1.    Is health care different from other goods & services?  If so, how?

a.    Is health care a public good?  Definitely not, since

                   i.     It is excludable; non-payers can be excluded.

                 ii.     It is not jointly consumed; all of us do not consume all that is produced.

               iii.     It is exhaustible; units of health care consumed by Ben cannot be consumed by Betty.

                iv.     It does not have zero marginal cost in consumption; adding another consumer requires additional production, and therefore, additional cost.

                  v.    And yet, health care does generate a positive externality in consumption, because most people are unwilling to ignore suffering of others; therefore, we all gain value from the consumption of health care by others; most people are willing to pay something for the health care of people who unable to pay for their own health care.

b.    Is health care scarce?  Definitely yes;

                   i.     The quantity of health care available is insufficient for everyone to have all they want without sacrificing something else they also want.

                 ii.     Production of health care requires the use of valuable land, labor, and capital, just like other valuable goods. The owners of the land, labor, and capital used must be paid the opportunity cost of their valuable resources, which makes the supply curve of health care upward sloping.

               iii.     Because it is scarce, health care must be rationed somehow; if not by willingness and ability to pay money, then what?

c.    Do people "need" health care?   

                   i.     Health care is not a single, homogeneous economic good; health care ranges from a band aid and an aspirin to heart replacement surgery.

                 ii.     If some quantity of health care is needed, how much? People do not need any particular quantity and quality of health care.

               iii.     Substitutes for professional health care include watching and waiting (human bodies have incredible recuperative abilities), home remedies, and self care (although the possibilities for self care are substantially limited by law).

                iv.     Different people want different amounts and qualities of health care; people seek to maximize their own net benefit from consuming health care, which means they attempt to find the quantity and quality for which MPB=MPC.

                  v.    Equal consumption of health care by everyone isn't possible, and if it were possible, few if any would say equal consumption by all would be fair.

d.    Is health care a basic human right, regardless of ability to pay? 

                   i.     If so, who has the responsibility to provide health care, since a right for one always implies a responsibility for someone else? Do not say "society" has the responsibility, because "society" is not a person, it is a collective noun.

                 ii.     If so, how much health care and what quality of health care does everyone have a right to? Do not say "enough to stay alive," or "enough to be well," because neither is definable or quantifiable.

e.    Which economic good is health care more like:  cars or food?

                   i.     Health care is more like food, so why don’t we have all the same public policy issues with food that we have with health care?

                 ii.     Why don’t employers typically provide a "food benefit” as part of their compensation to employees?

               iii.     Consider the cost of food per typical person for a year compared to the cost of health care per typical person for a year. Why is health care so expensive, compared to food?

                iv.     Why do we not eliminate restrictions on the supply side for health care?

                  v.    Is asymmetrical information a serious problem with health care? Not really; asymmetrical information is far more serious with automobiles.

2.    What are justifications for government intervention and obstruction of voluntary exchange in health care? Do the conventional justifications offered by economists apply to health care?

a.  Not market power; nothing besides government laws and regulations keeps health care from being highly competitive.

b. Not externalities; even though most people are sympathetic and willing to help others who are suffering, we have no evidence whatsoever that not enough health care will produced without government intervention. We have ample evidence to the contrary.

c.  Not the public good argument; health care has none of the characteristics of a public good.

d. Not the incomplete or asymmetric information problem; consumers know more about health care than they do about their cars.

e.  Certainly not economic stabilization.

f.   What about equity, fairness, and justice?  (is there an efficiency-equity trade off with production or consumption of health care?)  No more so than for any other economic good.

3.    Does health care fit the insurance model?

a.  Yes, for catastrophic illness, we do have low probability of high cost events, which are insurable events, but not for routine health care.

b. Health care insurance generates moral hazard, as does any insurance.

                   i.     May influence eating choices (obesity, junk food), if individuals do not have to bear the full cost of their choices.

                 ii.     May influence life-style choices (lack of exercise, smoking, speeding, riding motorcycles), if people do not have to bear the full cost their choices.

4.    Why are employers involved in health care insurance; they aren't involved in home insurance or car insurance?

a.  There is no philosophical or economic reason.

b. Employer involvement is an historical artifact of wage-price controls during WWII, which kept employers from competing for employees using wages.

5.    Is asymmetric information a serious problem with health care?

a.  No; in which economic good is information more asymmetric:  car repair or health care?

b. Are health care providers better judges of the marginal benefit of health care than patients, and therefore better positioned to decide the quantity and quality of health care someone should consume?

c.  For most goods and services, consumers can and do use price as a principal source of information about value, cost, and relative scarcity; but not for health care, because unit prices for health care services are generally nonexistent; health care providers do not compete on price, and prices generated by voluntary exchange in unfettered markets do not exist, due to government intervention.                                            

d. If we don’t use prices (willingness and ability to pay) to ration health care, then we also cannot use prices to give us information about relative value and cost of health care compared to other goods and services.

e.  If we don’t use voluntary exchange guided by relative prices to ration health care, how can we expect that MSC will equal MSB? We cannot.

6.    What's wrong with third-party payments for health care?

a.  Third-party payments are payments made to producers of healthcare by someone other than the consumer of health care.

b. For most insurable risks, insurance is not a third-party payment system, since consumers generally pay for insurance they purchase (e.g., auto insurance, property and casualty insurance, home insurance, life insurance); but for health care, what is called "health care insurance" is typically paid for by an employer or by tax payers.

c.  What economic outcomes can we expect from 3^rd party payment for health care?

                   i.     Excess demand for health care services.

                 ii.     Shortage of suppliers of health care services.

               iii.     Rising cost of producing health care.

                iv.     Rationing of health care using some criteria other than price, e.g.,

·      Waiting in the doctors' offices and emergency rooms,

·      Denial of insurance claims,

·      Burdensome, bureaucratic procedures to get insurance claims accepted,

·      Doctors who refuse Medicare and Medicaid patients,

·      Denial of medical procedures by review boards, and

·      Limitations on eligible suppliers of health care services (HMO, PPO).

7.    What behaviors from employees can we expect, due to employers using health care benefits to compensate employees?

a.  Employees will demand more health care benefits, due to obfuscation of who is bearing the cost.

b. Low-wage employees typically won't be compensated with health care benefits (e.g., employees of McDonalds), because.

                   i.     Health care is expensive as a percentage of low-income workers’ wages

                 ii.     Low-income workers don’t tend to stay with the same employer as long as high-income workers

               iii.     Low-income workers need money, not health care benefits, since they don’t get much income to pay for food and other goods and services they want; in other words, low-income employees typically don’t want part of their pay in the form of health care benefits.

c.  Money wages of employees will not rise as fast as they otherwise would.

d. Employees will consume health care services beyond the point of MPB=MPC

e.  Employees may be less mobile, remaining in current jobs to avoid loss of health care benefits

f.   Employees may delay retirement to avoid loss of health care benefits

8.    Can government somehow achieve greater economic efficiency and equity by intervening in voluntary exchange markets? In a word, no. In fact, the opposite is true.

9.    What does economic logic tell us is the most efficient remedy, if we find someone who has little ability to pay for health care, but we’ve decided that the person deserves some minimum level of health care? Give the person some money or a health care voucher.

10.Can the U.S. health care “system” be “reformed" from where we are now? Probably not.

a.  We have no reason whatsoever to believe that government operatives will bring us greater efficiency or equity in health care, compared to voluntary exchange.

b. There is no “system” that suspends human nature and the laws of supply and demand, both of which apply to health care, just as they do for car care and food care.

c.  Voluntary exchange in competitive markets gives us as much efficiency and equity as possible, provided we make provision for the rather small number of people who are unable to pay for even modest health care services.

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The 545

Here is a link to an excellent article written years ago by Charley Reese. Every voting citizen of the United States should give this article a read and ponder its message carefully.

Redistributing Income

As you may have noticed, one of the two major political parties in the United States is all about redistributing income.  According to supporters of that particular political party, the distribution of income that results before redistribution is not equal enough and is not fair.  Consequently, much of the legislation supported by this political party is designed to take income away from Peter (who evidently has more income than would be fair) and give it to Paul (who evidently has less income than would be fair).

Members of this political party also complain that the top 1% of income earners in the United States earn way, way too much more than 1% of total income, and the lowest 20% of income earners earn way, way too much less than 20%.  Some people agree with the claims of this political party; some people do not. 

The word "fair" has no clear, settled meaning.  Yet, we all use the word as if we all know exactly what it means.  In my judgment, the word "fair" cannot be used in any logical way in talking about the distribution of income. 

Some people say that "fair" means "equal."  But it's hard to see how equal income for engineers and restaurant servers could be thought fair by anyone.  Moreover, I've never met anyone who thought engineers and restaurant servers should earn equal income.  Some people say that "fair" means "deserved."  Perhaps, but if so, what will we want to say "deserved" means?  Does Tiger Woods deserve his enormous income, just because he possesses athletic abilities particularly suited to hitting golf balls into small holes?  Does Bill Gates deserve his enormous income, just because his mind is so structured that DOS made sense to him for a computer operating system?  Don't we all "deserve" prosperity?

The distribution of income in the United States is unequal because the capabilities of people are unequal and because all people do not want the same goods and services.  Equal income cannot and will not come about in a society of people who have different capabilities and who have different wants. 

Attempts to redistribute income in the United States, which have been ongoing on a major scale since the "War on Poverty" initiated by President Lyndon Johnson in the early 1970s, have scarcely changed the real distribution of income in the United States.  Today, through a variety of transfer payment programs, government transfers about $1 trillion per year from someone who earned the income to someone who did not.  The simple truth is that if somehow overnight, income were distributed exactly equally among the nation's 125 million households, within just a few weeks, income would once again be distributed unequally.  Until people all have the same capabilities and the same economic wants, the distribution of income will remain unequal.

Human prosperity is not the same thing as the distribution of income.  As an observable matter of fact, human prosperity around the world has been rising dramatically over the past 250 years. Perhaps people would benefit by focusing more on the causes of human prosperity and less on the distribution of income.  But try telling that to the political party that favors redistribution of income.

P.S.  I am personally not a member of a political party.  I am not a partisan, so please don't disparage my simple observation of obvious truth for political argument.

Capital and Money Are Not The Same Thing

The word "capital" is bandied about as if the word had a concrete, common, well understood meaning. But does it?

For economists, capital is the third fundamental category of scarce resources --- as in land, labor, and capital --- categories that every faithful student of ECON 101 no doubt memorized. On this account, capital includes factories, equipment, and tools. On another account also used by economists, people are said to be investing in and building "human capital" when they go to college or invest time and money to learn new skills. On both accounts, capital is said to be the fundamental source of rising productivity of labor, without which, rising labor income is not possible.

In financial contexts, the word capital most often seems to mean simply "money." On this account, capital is said to "flow" to its highest valued use, if markets are free, to flow between countries, if unrestricted by governments and their central banks, and to be the life blood and wellspring of economic growth and prosperity. Businesses are sometimes said to be "capital constrained" or "under capitalized." Countries are sometimes said to restrict capital outflows (e.g., China), or to attract capital inflows (e.g., America).

Researching the etymology of the word, we find that an early meaning of the word "capital" is from the medieval Latin capitale, meaning a "stock" of something. On this account, one could have capital in the form of grain, cattle, gold or just about anything of value --- including a stock of money.

But on all accounts, the word "capital" really means something beyond simply money. To accumulate a stock of anything requires saving, as opposed to consuming or using up the thing. Hence, money can be capital, but not all money is capital. How so?  Income that is saved in the form of money is capital. But newly created money --- which is to say money created from "thin air" by commercial banks and the Fed --- is not capital.

The world is awash in money these days. But the world is not awash in capital. Is it mere coincidence that the substantial slowdown in growth of GDP in America over the most recent eight years correlates substantially with rapid growth in newly created money, much of which now resides in reserve accounts of commercial banks? Or is it a slowdown in accumulation of real capital --- which requires saving --- that better explains the slowdown in economic growth?

A second early meaning of the word "capital," also from medieval Latin, is capitalis pars, which designated the principal sum of a money loan. In medieval days the principal sum of a loan of money pretty much had to come from money saved. In those days, it was easy to understood that one could not borrow money that had not first been saved. Consequently, if one borrowed, one would typically be borrowing capital.

Not so in today's world of commercial banking, central banks, and money created from nothing. So called "quantitative easing" does not create capital; it just creates new money. In the United States, the Fed purchased Treasury bonds with that money, enabling the federal government to continue increasing its spending.

If some of that spending finds its way to you, you probably don't mind. And since none of that increased spending requires reduced spending by someone else, no worry, right? It's rather like a free lunch, right? Except, there ain't no such thing.

Yes, here I am, beating an old dead horse once again. You can't borrow that which has not first been produced and saved, an idea I've written about before, here.  But you can borrow newly created money, which amounts to a kind of counterfeiting. Here's how it works.

You deposit $1 in your bank account, say a dollar of income you earned by working. By law, the bank is allowed to lend 90 cents of your dollar to Tim. The bank must hold only about 10 cents in its reserve account with the Fed. Now you have $1 that you can spend, and Tim has 90 cents that he can spend. Where did the 90 cents of purchasing power come from? Thin air, as they say.

You created your $1 dollar claim over goods and services by providing a service called labor. But Tim created no goods or services in return for his newly created command over goods and services. Does Tim's new claim on goods and services somehow seem bogus?  You decide.

When Tim spends the 90 cents, that 90 cents shows up in another bank pretty quickly. The second bank is allowed by the Fed to lend 81 cents to Bob. If you like math, you can see where this is going. If the banking system as a whole does all the lending its allowed to do, retaining only 10 percent of deposits in reserve, your original $1 deposit into the banking system can result in up to $10 additional money created from thin air.

The federal government would consider it a grievous crime if Tim were to counterfeit 90 cents on his own and spend it, but it's somehow not a crime if the commercial banking system does what amounts to the same thing.  To add insult to injury, the banking system earns interest on its loans of your dollar to Tim, Bob, and so on. If you have an interest bearing account with your bank, the bank pays a small fraction of that interest to you and keeps a larger fraction for the bank's owners.

Through the magic of fractional reserve banking, people are able to borrow money that has not been saved by its owner. It's a kind of alchemy, seemingly generating something from nothing.

Some folks worry that money creation from thin air will ultimately lead to price inflation. If it does, then the counterfeiting we call fractional reserve banking turns into outright theft, since price inflation robs you, the original owner of the $1, of purchasing power. If you had saved a dollar in 1913, the year the Fed was created, today that dollar would purchase perhaps 9 cents worth of goods and services at today's prices. You might be forgiven if that loss of purchasing power seems to you a little like theft of 91 cents of your saved dollar.

When it is the federal government that borrows your $1, we get an even more insidious outcome. The federal government doesn't repay its debt, since it just creates additional debt to pay you back plus interest. Worse still, government acquires purchasing power over goods and services without taxing.  If government is building roads and protecting us from foreign despots, that's okay by me. But of course, federal spending isn't limited to road building and national defense.

Central banks around the world, especially the Fed, are making sure that the world is awash in money. But that money is not capital. It's just newly created claims over goods and services generated as if by magic from thin air.  Some believe that central banks around the world have built a house of cards. Let us hope that the wind does not blow too hard in the coming months.

The FairTax Is No Fantasy

The editorial below was published originally in The Roanoke Times, April 10, 2006. With all the presidential candidates laying out their ideas for tax reform, one wonders why none of them are proposing the FairTax.

The FairTax Is No Fantasy

By David L. Kendall

Kendall is professor of economics and finance at the University of Virginia's College at Wise.

Some critics of the FairTax, HR 25, such as Christian Trejbal in his March 22 column, "FairTaxers pitch a fiscal fantasy," call it a fantasy and a crackpot idea. But benefits of the FairTax are no fantasy.

If enacted as written, HR 25 would eliminate all federal income taxes for individuals and corporations. It would eliminate oppressively regressive payroll withholding taxes, now the cruelest burden on the working poor. The FairTax would replace all federal income and payroll taxes with a simple, progressive and efficient national retail sales tax.

Because the FairTax would eliminate all individual tax returns, April 15 would be just another pleasant spring day. HR 25 would eliminate the Internal Revenue Service and its annual abuse of our Fourth and 14th Amendment rights. A small federal agency would be needed to administer the FairTax, but the IRS as we know it would be abolished.

The FairTax would collect federal sales tax from every retail consumer in the country, including foreign visitors and even underground criminals, greatly enlarging the federal tax base. With a larger base, the average tax rate paid would go down, while the U.S. Treasury Department collects the same federal revenue.

The monthly prebate paid to all households under the FairTax would not be a new entitlement program. The prebate would simply keep income in the hands of the people who earned it. The HR 25 prebate is to the FairTax what the personal exemption is to the income tax, just sooner and fairer.

Recent studies estimate that the underground economy is about $1 trillion per year, all of it untaxed. That's tax evasion on a scale that simply could not happen with the FairTax. Significant evasion of the FairTax would require retailers like Wal-Mart, Kroger and your local dentist to help consumers avoid the sales tax; very unlikely. Potential tax evasion with the FairTax pales compared to the massive income tax evasion already happening.

The FairTax would bring greater accountability and visibility to federal tax collection. All Americans would understand clearly how much federal taxes they pay. People could even plan for taxes they would pay in the future, removing the mystery we face now.

With the FairTax, Congress would be compelled to be up front about tax increases. That's not the case now. When Congress changes tax law now, it takes years to sort out who won, who lost and how tax revenues changed.

The FairTax offers still more. Eliminating the federal income tax would attract more foreign investment to the United States. It would also give U.S. firms incentives to keep new manufacturing capacity in the United States. That means more jobs and faster economic growth.

Our federal tax code gives corporations enormous incentives to export jobs, money and manufacturing off shore. Studies suggest that replacing the federal income tax with a national retail sales tax could cause as much as $10 trillion to flow back into our economy from abroad to finance new plant and equipment. The long-run economic benefits for our children are obvious.

Businesses and other organizations spend more than 6 billion hours each year complying with the federal tax code. That's time and expense wasted. Economists estimate that compliance costs top $250 billion annually. Although out of sight and mind, those costs are real, and consumers are paying them now.

Through competition, the FairTax would compel businesses to lower retail prices. For corporations, taxes and compliance costs are like any other cost of doing business; they must be recovered in prices. With the FairTax, consumers would see retail prices drop by 20 percent to 25 percent.

So, if the national sales tax were 30 percent, the retail cost of the $100 iPod shuffle plus tax would not be $130. Instead, it would be more like $80 plus a $24 sales tax. Because consumers would have their whole paycheck to spend, instead of their "after withholding" paycheck, the $104 iPod, including tax, looks pretty reasonable.

The current federal income tax code is widely regarded by just about everyone as unfair, wasteful and mind-numbingly complex. It's time for dramatic, real change. It's time we demand that Congress pass HR 25.

The Law Means Nothing in 21st Century America

Here, Michael F. Cannon, an expert on the economics of health care and the provisions of the Patient Protection and Affordable Care Act (PPACA), remarks briefly on the June 25th, 2015 decision of the Supreme Court to allow the IRS and the Obama administration to ignore the law.

Here, you may read a few succinct words from the dissent of Justice Antonin Scalia, who along with Justices Clarence Thomas and Samuel A. Alito Jr., voted to uphold the law, as written by Congress. Six justices, Sotomayor, Kagan, Ginsburg, Breyer, and Kennedy, and Chief Justice John Roberts, voted to ignore the words Congress specifically wrote into the Obamacare Act.

Given the completely clear language of the Act, and given the well-known, express intention of Congress to deny Obamacare subsidies for citizens of states that chose not to establish their own exchanges (a provision of the PPACA that Congress fully intended to entice states to establish their own exchanges), today's Supreme Court decision in King v. Burwell makes a complete and absolute mockery of the rule of law and the Constitution of the United States.

How can Americans be anything but ashamed of our President and the six members of the Supreme Court responsible for today's ruling?

It's now completely clear that Americans live by the rule of a few privileged and powerful men instead of the rule of law, men who are able to ignore completely---evidently with impunity---the Congress of the United States and the laws it passes.  Forget about the Constitution; it means nothing.  Forget about laws passed by Congress and signed by the President; they mean nothing.  Forget about liberty; forget about the principles of law and justice that once made America great.

What now can this President and future presidents not do?  What principles now limit the power of  American presidents?  What law cannot be broken, if the President chooses to break it? Evidently, the President of the United States can do whatever he wishes to do.  Today is a very dark day in American history.

Public Choice Economics

Principles of the Economics of Public Choice

• Public choice applies the methods of economics to the theory and practice
of politics and government. The economics of public choice gives us useful
insights into the nature of political decision-making.
• Just as self interest motivates the choices people make, self interest also
motivates the decisions people make in a social context. The Fundamental
Hypothesis of Economics (FHE) applies.

• Decision making in a social context (the so-called "public sector") is
necessary for every society. But the fact that voluntary exchange markets
may sometimes fail to yield efficient outcomes — or outcomes that someone
considers fair — does not mean that government operatives will do a better
job. Governments fail, too. Political decision making is not a dispassionate
pursuit of the "public interest," if for no other reason, because nothing is in
the interest of everyone.

• What is in the "public interest" cannot be defined in a meaningful way,
because we live in a world of multiple values. Different people have
different values and different interests. We also live in a world of conflicting
values. For example, which do you prefer; greater safety or greater freedom
and opportunity? Arguments that depend on the notion of "public interest"
are fundamentally flawed.

• In the struggle between different interests, small groups with narrowly
focused interests — what we often call special interest groups — have more
influence in decision making than much larger groups such as consumers
and taxpayers. Because enormous benefits can be won using the political
process and the force of government, it is rational for special interest groups
to spend large sums of money on lobbying for special privileges — an
activity that economists call "rent seeking." Concentrated benefits paid for
by widely dispersed costs give special interest groups outsized influence in
political decision making.

• The political institution of representative government (a.k.a., a republic)
creates a political market for votes, in which legislators engage in what is
called "logrolling" on behalf of the special interest groups that support
politicians with money. Logrolling is politician A agreeing to vote for
politician B's favored bill, in return for politician B agreeing to vote for
politician A's favored bill, when in fact, neither politician likes the other's
bill. With logrolling, special interest groups that want A's and B's bills
benefit handsomely, while consumers and taxpayers absorb the cost.

• In direct democracy, using mechanisms such as referenda, the majority
voting rule that is commonly adopted allows a 51 percent majority of the
voters to overrule 49 percent of the voters, and overrule up to 100 percent of
the citizens who don't vote. In representative democracies, even smaller
fractions of the population have greatly outsized influence, due to lobbying
and the outcome of concentrated benefits received by special interest groups
at the expense of widely dispersed costs levied across all taxpayers and
slightly higher prices paid by consumers for goods and services.

• Many economists and political scientists who study public choice agree
that political decision making must be constrained by overarching
constitutional rules. But as the American experience demonstrates, even a
government that is supposed to be tightly constrained by constitutional rules
and limited powers soon enough becomes a government that ignores
constitutional rules. The power of concentrated benefits to the few, with
costs widely dispersed across the many, is evidently difficult to impossible
to impede. Regardless of written laws, we always have a government of
men, not a government constrained by laws.

Who Bears the Burden of the Income Tax on Corporations?

Who Bears the Burden of the Corporate Income Tax?

No other question in the arena of public finance is as controversial as “who bears the burden of the corporate income tax.  Economists who specialize in public finance simply don’t know.  So, if you encounter an economist who says he does know, you will know you have found an economist who says more than he knows!

The first fact to get on the table right at the beginning is that only people pay taxes.  Corporations remit taxes, of course, based on income that they earn (a.k.a., net income or profits), but that does not mean that corporations (which are not persons) bear the burden of taxation of corporate income.  By now in this course, we are familiar with the difference between tax incidence and tax liability. 

Whoever it is that bears the burden of taxation of corporate income, those persons will get to spend (or save) less each year than they otherwise would, if the United States did not tax income earned (a.k.a., earnings or profits) by businesses registered with the IRS as C corps.   Only persons from three broad categories could possibly bear the burden.  They are (1) shareholders of a corporation (owners of the corporation), (2) owners of the factors of production (land, labor, and capital), which the corporation pays to use, (3) persons who buy goods or services from the corporation (consumers).  Consequently, I am absolutely certain that I do not bear any burden of the income tax paid by GM, since I am not a shareholder, I do not sell GM factor services that I own, and I do not buy GM products. 

Students of public finance will recall that people who have few options to avoid a taxed activity (such as earning income or buying cigarettes or buying insulin) will end up bearing all or part of the burden of any tax, regardless of who actually has legal liability to collect and remit the tax.   Economists say that such persons have “inelastic” demand (or supply) curves for the activity.  Perfectly inelastic demand or supply curves result in complete bearing of the burden of a taxed activity in which one engages.  

So, if I must work to live, and if the politicians tax wage income, then I will bear nearly all the burden of a tax on my wages.  On the other hand, if I am independently wealthy, and the politicians tax wage income, I can avoid bearing part of the burden of a tax on wage income by reducing the hours I work for pay, up to and including not working for wages at all!

I am really confident that shareholders bear the immediate burden of a new or a raised tax on corporate income in the economic short run.  They do so because the corporation will remit money to the government that would otherwise have gone directly to shareholders equity (retained earnings) or would otherwise have been paid directly to the shareholders as dividends.  Following the imposition of a new or a raised tax, corporations will not have time to raise the price of their products to shift the tax forward to consumers, nor will they be able to shift the tax backward to employees by reducing their wages and salaries, nor will they be able to shift the tax backward to owners of land they are renting by negotiating a lower rent, nor will they be able to reduce what they are paying for any other factor of production.

But in the economic long run (after people make all the adjustments to a new tax they care to make), I think that consumers of goods and services sold by corporations bear most of the burden of taxation of corporate earnings.  I cannot be sure, though, because the lived world does not allow economic researchers to conduct an experiment that can appropriately hold everything else constant while we impose a new tax and measure everyone’s income before and after the new tax, after an appropriate amount of time has passed to allow everyone to make all the adjustments they care to make.

 But we can be sure that given enough time, shareholders (who are supplying capital to finance activities of corporations) will reduce the quantity of money (capital) they supply, if the rate of return to holding shares of corporations is lower than the rate of return such savers (a.k.a., investors) can earn through some other activity.  Alternatives to holding shares of stock in a corporation abound.  One can buy gold, paintings by Monet, farm land in the Midwest, corporate bonds, silent partnerships in non-corporate forms of business, etc.  Investors (a.k.a., savers) do not have to buy shares of stock in  C corporations in the United States.  Capital always flows to the highest bidder (of equal risk), given enough time, just like water seeks the lowest level.  So, owners of capital have options for avoiding the corporate income tax.  It’s hard to imagine how shareholders will end up bearing the burden in the economic long run.

What about employees of corporations?  Can owners of a corporation (shareholders) push the burden of the corporate income tax backward to its employees, by reducing their pay (or by withholding future raises as inflation occurs)?  Or, can employees just work somewhere else, should owners of the corporation try to shift the tax?  Do employees have options to avoid the backward pushing? 

At this point, I want to point something out.  Shareholders do not meet somewhere and vote whether or not to try to shift the income tax levied against their corporation.  Moreover, employees have no way of knowing whether their wages and salaries are not rising fast enough to avoid getting some of the burden pushed back to them.  The very language that economists use to talk about shifting tax incidence is actually a little silly, since any tax shifting that occurs is completely hidden from view and takes an unknown amount of time to occur, if it does occur.

What about consumers who purchase the products of corporations?  In the economic long run, can corporations simply raise their prices to shift the burden of their income tax forward to consumers?  I think that corporations can and do just that.  After all, businesses must be able to recover all the costs of production, plus a competitive profit to compensate owners of the business, in the economic long run.  Businesses that cannot cover all the costs of production will quit producing, in the economic long run.

From the point of view of a business owner, paying taxes is just like paying the electric bill.  Taxes can be thought of as a slip of paper that says “you paid your taxes,” which slip of paper is required to produce and sell, and which is just another cost of doing business.  Consequently, I think that in the economic long run, prices of goods and services produced by corporations adjust upward to include the complete burden of the corporate income tax, thereby shifting the burden of the tax to people who buy those products. 

But, I will conclude by repeating that I cannot know for sure, nor can any other economist.