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J. Penalties on Market Forms
Any form of governmental penalty on a type of market production or organization injures the efficiency of the economic system and prevents the maximum remuneration to factors, as well as maximum satisfaction to consumers. The most efficient are penalized, and, indirectly, the least efficient producers are subsidized. This tends not only to stifle market forms that are efficient in adapting the economy to changes in consumer valuations and given resources, but also to perpetuate inefficient forms. There are many ways in which governments have granted quasi-monopoly privileges to inefficient producers by imposing special penalties on the efficient. Special chain store taxes hobble chain stores and injure consumers for the benefit of their inefficient competitors; numerous ordinances outlawing pushcart peddlers destroy an efficient market form and efficient entrepreneurs for the benefit of less efficient but more politically influential competitors; laws closing businesses at specific hours injure the dynamic competitors who wish to stay open, and prevent consumers from maximizing their utilities in the time-pattern of their purchases; corporation income taxes place an extra burden on corporations, penalizing these efficient market forms and privileging their competitors; government requirements of reports from businesses place artificial restrictions on small firms with relatively little capital, and constitute an indirect grant of privilege to large business competitors.40
All forms of government regulation of business, in fact, penalize efficient competitors and grant monopolistic privileges to the inefficient. An important example is regulation of insurance companies, particularly those selling life insurance. Insurance is a speculative enterprise, as is any other, but based on the relatively greater certainty of biological mortality. All that is necessary for life insurance is for premiums to be currently levied in sufficient amount to pay benefits to the actuarially expected beneficiaries. Yet life insurance companies have, peculiarly, launched into the investment business, by contending that they need to build up a net reserve so large as to be almost sufficient to pay all benefits if half the population died immediately. They are able to accumulate such reserves by charging premiums far higher than would be needed for mere insurance protection. Furthermore, by charging constant premiums over the years they are able to phase out their own risks and place them on the shoulders of their unwitting policyholders (through the accumulating cash surrender values of their policies). Moreover, the companies, not the policyholders, keep the returns on the invested reserves. The insurance companies have been able to charge and collect the absurdly high premiums required by such a policy because state governments have outlawed, in the name of consumer protection, any possible competition from the low rates of nonreserve insurance companies. As a result, existing half-insurance, half-uneconomic “investment” companies have been granted special privilege by the government.
- 40. The withholding tax is an example of a “wartime” measure that now appears to be an indestructible part of our tax system; it compels businesses to be tax collectors for the government without pay. It is thus a type of binary intervention that particularly penalizes small firms, which are burdened more than proportionately by the overhead requirements of running their business.