The Mises Institute monthly, free with membership
Volume 14, Number 7
Economists as Tax Hustlers
Thomas J. DiLorenzo
The media often cite economists on why taxes should be cut.
For example, the Wall Street Journal reports "widespread
agreement" among economists that federal gas taxes are too low.
And the Washington Post cites the "authority" of
economists who says a $500-per child tax credit is "fiscal snake
Why do some economists oppose tax reductions? Let's look at
gas tax case. A cut in the tax will "hurt the deficit," according
to Nada Eissa, an economist at Berkeley. But history shows that
raising taxes inevitably causes an increase in
government deficits. Politicians invariably spend every dollar
and more. Giving them more money only encourages them to spend
The professor's statement is based on statist ideology, not
economics. If anything, cutting the federal gas tax will force
politicians to reduce the rate of growth of government spending.
That leaves more money in the pockets of taxpayers. By opposing a
tax cut, economists are saying Americans have too much money in
their pockets. That's not economics, but political pandering.
Economists also want to discourage driving because it creates
"negative externalities." "When people consume gas," says David
Romer, another Berkeley economist, "they impose harm on other
people that they aren't paying for otherwise. They crowd the
freeways and pollute." (Forbes profiled Romer last year
as a potential Nobel Prize winner.)
But this is pure fantasy. Most car pollution is caused by
relatively few, older cars--"crop dusters"--that spew much more
pollution than the typical clean, newer-model car. Besdies how
does Romer know what the "socially optimal" level of production,
pollution, or driving should be? The right approach is not to
kick and prod the market, but merely to enforce property rights.
Government regulation already imposes enormous implicit taxes on
petroleum and petroleum products, driving the price to a level
that maybe much higher than the "social optimum."
There are other reasons gasoline is overpriced. EPA regulation
has strangled American oil refineries so badly that it has been
20 years since a new refinery has been built in this country. At
least 130 gasoline refiners have been driven out of business in
the past 15 years, 33 since 1988. Chevron reportedly paid $100
million to get rid of its "environmental liabilities" when it
sold one of its refineries to Sun Oil in 1994.
Government regulation has made oil exploration in the outer
continental shelf virtually impossible. It has also prohibited
the development of vast oil reserves in Alaska, further
restricting supply and driving up prices. Regulatory of the
nuclear power and coal industries has sharply curtailed the
supply and raised prices.
Ignoring all these facts leads some economists, such as the
University of Michigan's Joel Slemrod, to sound extremely
foolish. Slemrod argues that the gas tax should be increased
because of our "dependence on foreign oil." But if Slemrod were
genuinely concerned about American dependence on foreign oil, he
would advocate deregulation.
Forcing the oil companies to simply collect more taxes for the
state will not reduce our dependence on foreign oil. Nor is such
"dependence" undesirable; it is the desirable consequence of the
law of comparative advantage.
Romer makes a similarly absurd argument when he says that
"low" gasoline taxes are the cause of traffic congestion. The
cause of traffic congestion is that government owns the roads and
are free to all. Raising gas taxes to pay for building more
socialist road systems will not alleviate traffic congestion
Economists who favor raising gas taxes are either uninformed
about the realities of energy markets, misunderstand and misuse
economic theory, or, more likely, are merely propagandizing for
government intervention under the guise of "science."
Similar errors drove some economists to oppose the $500
per-child tax credit for families. Herb Stein of the American
Enterprise Institute, who oversaw Richard Nixon's imposition of
price and wage controls, complained that the tax credit plan "is
just doling out of money" and thus should not be tolerated.
The implicit assumption here is the idea that government owns
all income, and if it chooses to give the taxpayers a small tax
break, it is "doling out" a gift. Yet allowing families to keep
more of their income will unequivocally enhance their welfare and
increase economic productivity, for citizens always spend their
money more wisely than government bureaucrats.
Keynesian economists Allen Sinai of Lehman Brothers and Barry
Bosworth of the Brookings institute oppose the tax credit by
arguing that if government spends, it will not stimulate demand,
but merely drive up prices.
This is sheer nonsense. Only injections of new money push up
the general price level. Consumer spending grew rapidly
throughout the 1980s, as inflation declined. But Sinai and
Bosworth do not let good theory and facts get in their way. Nor
do they consider that investment that government spending crowds
out of the private-sector.
"This is like loading $500 bills into an airplane and just
dumping them," complains Bosworth, who further warns that
"taxpayers would save about 5 percent of their sudden windfall
and spend the rest." Well, what in the world is wrong with that?
Throwing tax dollars out of an airplane would be far less
destructive than other government programs.
The most ridiculous argument against the tax credit is one
made by anonymous "analysis" highlighted by the Post: it
could "spur an increase in the purchase of imports." Inciting
fear of foreign goods, the Post further contends that
the tax credit plan should be named, "Contract with Japan." But
if American consumers choose to do business with the Japanese
they should be free to do so. That the Japanese are competing
vigorously for American consumer dollars should be praised.
Good economics, as well as all experience, teaches us that
when wealth and property controlled by the American people in
their capacity as producers, savers, and consumers, society is
prosperous and the economy is efficient. It is the economist's
primary responsibility to point this out.
What, then, can we say of economists who shill for government
by denouncing all tax relief and calling for higher taxes? It
speaks volumes about the urgent need to teach economics to the
economists, so they'll stop teaching statism to the politicians.
Thomas J. DiLorenzo teaches Economics at Loyola College and is an adjunct scholar with the Mises Institute