Friday, October 21, 2011

Murphy Atttacks Rothbard on His Consumption Tax View

Bob Murphy has decided to enter the 'consumption tax' versus 'income tax' fray and points to an article where he writes Rothbard is wrong about the consumption tax:

Well, when working on my PRI Flat Tax pamphlet [.pdf], I realized Rothbard and I were wrong. An income tax really does distort the consumption/saving decision, moving it away from the margin that the consumer would have chosen in the absence of taxes. In other words, the consumption tax makes the consumer poorer, to be sure, but at least the consumer gets to decide in which time period to distribute the blow. But an income tax is a double whammy–it takes away from your overall budget, but then puts on extra penalty on your decision to carry income forward.
Say what? 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.


  1. He acknowledged that in the first part of the post.

    "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)."

    He comment wasn't critiquing Rothbard but just positing that a tax on savings can lead to more distortions.

  2. Never mind, now that I reread his post it does appear that he misinterpreted Rothbard.

  3. I just read that section of Man, Economy and State. Spot on Wenzel.

    I sort of disagree that there is no blow to the consumer. If land and labor costs go higher due a consumption tax some goods could be left out of production as compared to no taxes. With zero taxes some small margin goods would be available for production that couldn't be produced at the cost associated with land under a consumption tax. I'm not saying labor determines price, but that if a price is too low to meet the labor cost it won't get produced, or for very long.

    Obviously, all of us would prefer no tax at all.

  4. @ Dan. I was going to point out the same thing. But I believe what BW is saying is that the burden is shifted back to labor, and that is the point. It isn't born on consumption, but on labor. Which would challenge the idea that it would distort. Thats my best interpretation.

  5. Still waiting on an answer......

    Income Tax or Consumption tax? What would you prefer BW? We all get that 0 taxes is ideal, but in this imperfect world, what would you prefer?

    Still waiting.....

  6. @anon 1:51pm

    Which would you prefer - anal raping or repeatedly being bludgeoned in the head with a pipe? We all get you would prefer neither, but in this imperfect work, what would prefer?

    Still waiting ...

    p.s. Wenzel already said capitation tax

  7. If I had to pick one because I was having an adult conversation, I would pick bludgeoned in the head. There is your answer. Now when you want to grow up and answer my question, go for it.

  8. capitation tax wasn't an option

  9. @anon 2:18, the answer is that they both suck equally. One or the other makes no difference. Your question doesn't have the correct answer as an option. It's a stupid question to begin with but at least have the courtesy to provide him the option of giving a correct answer. This is the same bs tactic MSM uses when they argue with Ron Paul. They give him equally bad choices and say pick one.

  10. Anonymous (October 21, 2011 2:18 PM)

    What makes you think anybody has an obligation to answer your stupid false-choice-fallacies?

    Who cares if capitation tax is not an option YOU are willing to offer in your hypothesis?

    Hate to break it to you, but even in statist politics the choice is larger than Cain vs. Obama.
    And even if one accepted there MUST be a tax, the choice is larger than income tax vs. consumption tax.

  11. "All Taxes are EVIL. Unless you believe Legalized Extortion is a good thing."

    Question: Why would freedom loving individuals waste precious time figuring out new and innovative ways to tax one another? Why not spend that time (and energy) fighting the beast?

    - Lawrence T. McElhinney

  12. Just stop the spending and we can debate about the way to raise minimum revenues for the skinned down state later.

  13. After reading Rothbard's opinion, I have to disagree. His assertion that the tax will be shifted backwards to land and labor is based on his analysis that the supply and demand curves do not shift based on the elimination of the income tax and the implementation of the consumption tax. I find this argument lacking. If we model the tax as an increase in the cost of production as Rothbard does, then we will see the supply curve shift to the left. Rothbard argues that since there in no increase in the money supply, the demand curve will not shift. But from the individual's perspective, he thinks he has more money than before and will try to purchase more goods accordingly. This is a shift to the right for the demand curve. Assuming an efficient market, the new equilibrium point will be at the same quantity and at a price that is (1+tax_rate) times the old price. Thus the only difference between an income tax and a consumption tax is in the consumption tax the individual is able to exercise his time preference.

  14. @Wenzel,

    In that case wouldn't a luxury goods tax be better than one on consumption per se?

    The retailers should have the ability to shift the tax forward to the consumers, since they are high earners.

    But usually that doesn't happen.

  15. Who cares? Income and consumption taxes are both theft, both immoral and both bad for society and the economy as a whole. Why are Austrians arguing over this anyway? One is just as bad as the other. Instead of bickering over which one causes less harm to the economy we should be doing all we can to demonstrate why neither is acceptable.

  16. Which would you rather have invade and occupy your European nation in the 1930s? Soviet Russia or Nazi Germany?

    If you say neither you are a coward!

  17. This argument would be put to rest if we all read "Ethics of Liberty" or "Democracy: The God that Failed".

  18. @Anon 7:04, That is the position I thought Wenzel was taking.
    1. That they are both equally bad.
    2. 999 could also give the illusion that changing the tax code rather than lowering the rate is the correct appoarch.

    Schiff is the one taking the position that one is better than the other and to that I agree with you. It's like asking would you rather see the banks nationalized or have TARP and the stimulus? I'm sure Schiif would say that both options are wrong so neither but when it comes to consumption/income tax he suddenly doesn't mind picking between equally bad choices. I believe Schiff probably believes that a consumption tax is better but I think his judgement might be clouded because of the better deal on taxes he would have personally under 999.

  19. We shouldn't be discussing what is the best way to tax the people. All taxes are robbery, period.

    However, figuring out which taxes are doing the most damage and how the damage is done (so we can prioritize our efforts in fighting them) is certainly useful. It would also be helpful to develop a body of specific arguments against the "better", "fair", etc taxation proposals which could be advanced by the statists.

  20. @Lila
    taxing luxury goods is the equivalent of taxing the producers of luxury goods and not the consumers.if the rich guy doesnt buy the overpriced yacht,you can be sure that the workers at the yacht factory are going to be laid off sooner than later.

  21. Averros is right. All these comments are tinkering around with the end of an argument that concludes taxation is OK... just find a method people wont complain about. The premise of that argument must be that a person does not have a right to his own life else one cannot come to the conclusion that taxation is OK.

    Instead begin with "a person has a right to his life" and you cannot argue forward to the point where taxation is OK.

  22. @Dyslexic...
    er...that was my point.
    If any tax had the ability to be shifted FORWARD to consumers, it would seem to be the luxury goods tax.

    Yet, as I wrote, that usually doesn't happen in practice. (i.e. it shifts back...)