Tuesday, September 21, 2021

Who Bears The Burden Of Taxes on Business?

On August 13, 1996, during the Republican National Convention, a panel was held in honor of candidate Steve Forbes.  I was invited to serve on the panel discussing Forbes’s tax plan, which was a slight modification of the original Hall-Rabushka flat tax.

Art Laffer, of Laffer Curve fame, was also on the panel.  He told a story about the impact of taxes on business.  I don’t know if it originated with Laffer or if he got it somewhere else.

 

Given the plethora of taxes that Biden and the Democrats want to impose on business, this is a good time to tell the story.

 

We all know about Robin Hood.  Few of us know that Robin had a twin brother, Robert who lived in a medium sized medieval town surrounded by prosperous farmers.

 

Robert was politically ambitious.  He wanted to be mayor.  He concocted a scheme that he thought might succeed.

 

Every year, about the same time, an itinerant merchant would come to town to buy goods for cash (silver coins) to sell to people in other towns.  Robert waited around the last bend on the road to town.  When the merchant came into view. Robert set upon him and seized his saddlebags of silver coins.

 

Robert returned home and called a meeting of the townsfolk and farmers.  He said he would give each of them a packet of silver coins equal to a year’s income if they elected him mayor.  And so, he was.

 

A year rolled around and Robert needed money to buy votes to be reelected.  Again, he hid behind the last bend in the road and robbed the unwary merchant.  He doled out the silver and was unanimously reelected.

 

Another year came to pass.  Robert waited for the merchant and seized the saddlebags.  To his dismay, they were empty.  Robert asked the merchant how he planned to buy goods without money.  He replied, “on credit.  I will write an IOU to each person and promise to repay them after I have sold the goods.”

 

Robert returned home and told the townsfolk he had no money.  They were extremely angry, grabbed him, tied him up, tarred and feathered him, mounted him backward on a donkey, and exiled him from town.

 

The problem?  After two years of free money, the craftsmen in town stopped working and the farmers stopped planting.  That winter many died from starvation and all the craftsmen lost their businesses.  No one had any money to buy what they needed to survive.  The merchant had changed his behavior and the craftsmen and farmers paid the price.

 

It took many years for the town and neighboring farmers to recover and all was well again.

 

But memories are short, especially after the older generation passed away.  Fifty years later, another ambitious politician arose with similar ideas.  You already know the end of the story.  “When will they ever learn?”

 

It seems never.  So here we are again, with politicians promising free money by only taxing rich merchants.