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12. The Economics of Violent Intervention in the... > 8. Binary Intervention: Taxation

F. Taxing "Excess Purchasing Power"

In this necessarily hasty overview of the high spots of taxation theory, we have space for only one more comment: a criticism of the very common view that, in a business boom, the government should increase taxation “in order to sop up excess purchasing power,” and thereby halt the inflation and stabilize the economy. We shall discuss the problems of inflation, stabilization, and the business cycle below; here, let us note the oddity of assuming that a tax is somehow less of a social cost, less of a burden, than a price. Thus, suppose, in a boom, that Messrs. A, B, and C, with the money they have on hand, would spend a certain amount on some commodity—say pipes—at a certain market price, e.g., $10 per pipe. The government decides that this is a most unfortunate situation, that the market price is—by some arbitrary, undivulged standard—”too high,” and that therefore it must help its subjects by taxing their money away from them, and thus lowering prices. Suppose, indeed, that A, B, and C are taxed sufficiently to lower the pipe price to, say, $8. By what reasoning are they better off, now that taxes have been increased by precisely the amount that their monetary funds have dwindled? In short, the “tax price” has gone up in order that the prices of other goods may decline. Why is a voluntary price, paid willingly by buyers and accepted by sellers, somehow “bad” or burdensome for the buyers, while at the same time a “price” levied compulsorily on the same buyers for dubious governmental services for which they have not demonstrated a need is somehow “good”? Why are high prices burdensome and high taxes not?