Why sales taxes do not affect prices directly

This is a continuation as to why Feiglin is wrong when he says that zero VAT on newly built homes will benefit the rich more than the poor, thereby widening the gap between rich and poor. (For people new to this blog, I still support Feiglin for Prime Minister enthusiastically. He’s just wrong on this issue.)

This is a very important point that few people understand, precisely because it is so counterintuitive. Consumption taxes like value added taxes, in Hebrew מע״מ for מס ערך מוסף, do not have a direct impact on the prices of goods that are taxed. If you search this blog, you’ll find that earlier posts from several years ago have made the same mistake in assuming that VAT is simply passed on to the consumer. It never is. It is impossible to pass on a consumption tax to a consumer. It is always passed backward onto the retailer, never forward on to the end consumer.

Murray Rothbard wrote about this in Man Economy and State, Chapter 12, section D, paragraph 4. Here it is: (I finished the 1,369 page book two months ago. Yay for me.)

In considering the general sales tax, many people are misled by the fact that the price paid by the consumer necessarily includes the tax. If someone goes to a movie and pays $1.00 admission, and if he sees prominently posted the information that this covers a “price” of 85¢ and a tax of 15¢, he tends to conclude that the tax has simply been added on to the “price.” But $1.00 is the price, not 85¢, the latter sum simply being the revenue accruing to the firm after taxes. The revenue to the firm has, in effect, been reduced to allow for payment of taxes.

The general sales tax Rothbard refers to is the VAT, or the מע״מ. So if we translate that to houses and use Feiglin’s flawed analogy, a house that costs 1.6M NIS, does NOT actually cost 288K less than that on the free market because of the VAT which is supposedly tacked on to the end. The house costs 1.6M, period, regardless of whether there is a VAT or not. Why must this be so?

Because a price is not just a number that a seller sets in order to make a certain profit he feels like making. If that were true nobody would ever sell at a loss. A price is what the seller can get on the market regardless of the profit he makes or doesn’t make. In other words, it’s not like the seller of a house or the builder of a house who is selling it feels like he has to make X profit on the house and therefore sells it for 1.6M assuming a VAT, but would sell it for 288K less if he sells it without a VAT and get the same profit. It doesn’t work that way.

A price is a finely tuned level where buyers and sellers equal out. It is the point where supply and demand meet, not the point at which the seller feels he has made enough money. If by divine intervention the VAT were abolished tomorrow, the price of housing would NOT suddenly shrink by 20% or whatever the VAT is. If it did you’d have a rush of demand that would immediately bid the price back up to the current levels.

A clear illustration of this is what happens at a supermarket sale designed to get you interested in a product. The supermarket often sets something at below a market price and then limits you to a certain amount of it. Say tomatoes are on sale for a shekel a kilo when the real free market price is 3 shekels a kilo. The store will inevitably limit you to, say, 3 kilos. Why the limit? Because by going below the free market price, it has voluntarily introduced a shortage, necessitating the limiting. If it were at the free market price, there would be no limit on any customer, because the free market price IS ITSELF the limit.

The current price of housing is the equilibrium point between supply and demand. If VAT were gone tomorrow on everything, the prices of everything would stay the same because the equilibrium point between buyers and sellers of anything has not changed overnight. If suddenly the price of housing dropped by the VAT amount, then you’d have more buyers willing to buy than sellers willing to sell, and the price would quickly jump back up to the current market price. Perhaps a few sales would be made at current prices minus the VAT, but they would be made so fast that the competitive bidding would very quickly push the price back up within days or hours to reach equilibrium again.

Therefore, there IS no benefit to rich people of 288K on a 1.6M house, because the price WOULD NOT CHANGE. Neither is there any direct benefit on any other buyer of any house no matter how rich or poor he may be.

Where there IS direct benefit is on the SELLER of the house, or the builder of the house who is the seller, in that he gets to keep the amount of money previously stolen from him by the government. The SELLER of a 400K house and a 1.6M house could be the same person. In fact, the seller of a 400K house could be rich while the seller of a 1.6M house could be poor. The benefit to them of getting rid of the VAT is that they no longer have to pay 20% (or whatever the VAT is) to the government, so they can keep that and reinvest it in say building more houses instead of buying more $60K Iron Dome missiles to swat flies out of the air from Gaza.

That eventually ups supply, gradually bringing the price down on everything. So yes, getting rid of VAT does lower prices INDIRECTLY, only by increasing supply through reinvestment of profits that would have otherwise been taken by government and spent on some inner city school prison. But in Israel, since the government owns 93% of the land, there is no way to up supply even if the VAT is obliterated. So housing prices would continue to rise, as Feiglin says in his post. However, even so getting rid of the VAT would lower prices on whatever the bigger profits were reinvested in, so we’d be better off on net anyway even if housing prices are not affected because of the government land monopoly restricting supply.

Conclusion: It’s not that buyers of more expensive houses will get a greater benefit. They won’t. It’s that sellers of more expensive houses will have less stolen from them. Those sellers could be anyone. Stop with the class warfare, I don’t want to hear anything about Rich vs Poor and the supposed battle between them. The battle is between taxpayers and tax receivers. The battle is between rich and poor taxpayers vs rich and poor tax receivers.

We need to fight the tax receivers until they no longer receive anything. (Yes, this includes Feiglin himself as a Knesset Member, and the only reason I give him an exception is that he is leading the fight from within the government, and there is no other way I see of taking them down legally and nonviolently.)

Moshe Feiglin Makes a Mistake on Zero VAT מע”מ אפס

This is for all the people who think I’m a mindless follower in a personality cult. I have criticized Feiglin in the past and I don’t agree with him on everything. Well now I’m going to do it again.

In his last Facebook post, he writes:

מע”מ – אפס פיתרון.

מע”מ אפס – פתרון למצוקת הדיור או העמקת הפער לטובת העשירים?

כבר מזמן פרסמתי את דעתי כי השורש של מצוקת הדיור הוא במצוקת הקרקעות לבנייה. כל עוד מדינת ישראל תחזיק ברוב הקרקעות ותספסר במכירתם מחיר הדיור ימשיך לעלות.

יש לחלק קרקעות לבניה לכל מי שסיים שרות צבאי או אזרחי באזורי הפריפריה בתנאי שהוא אכן יממש את הבניה בתוך פרק זמן סביר. יש להקים ערים כדוגמת מודיעין בשיפולי השומרון והרי יהודה. הגדלת מצאי הדירות תוריד את המחיר.

ברור שהצעתו של השר לפיד למע”מ אפס לא תייצר אף דירה חדשה ורק תעלה את המחירים. אך יחד עם זאת, פתאום הבנתי שהצעה זו חמורה פי כמה באמירה החברתית שלה היות והיא מגדילה את הפערים בין העניים לעשירים באופן מובנה.

לדוגמה: זוג בעל אמצעים שיקנה דירה ב-1.6 מליון שקל יזכה להטבה של 288,000 ₪. לעומת זאת, זוג בפריפריה שיקנה דירה ב- 800,000 ₪ יזכה רק למחצית מהטבה זו וכך השר לפיד יתרום באמצעות הכסף שלנו להגדלת הפער בין המשפחות בעוד 144,000 ₪.
יתרה מזו, ההטבה היא רק למי שקונים דירות חדשות, אבל מי שאין בידם אמצעים לקניית דירה חדשה ומסוגלים לקנות רק דירה יד שניה ב-300 או 400 אלף שקל לא יזכו לשום סיוע וכך הפער יגדל בין משפחות אלו לבין המשפחות שיקנו דירה ב- 1.6 מיליון ב- 288,000 ₪.

בקיצור, השר לפיד, אם אתה רוצה לחלק הטבות לזוגות הצעירים שאין להם דירה גם בלי לפתור את בעיית הדיור לפחות תעשה זאת בדרך הוגנת שלא מגדילה את הפער בין עניים לעשירים.
תקבע שכל מי שעומד בקריטריונים שקבעת יקבל בעת קניית דירה שתעלה לא יותר מ- 1.6 מיליון שקל, מאה אלף או מאה וחמישים אלף או כל סכום אחר שתחליט.
בדרך זו לפחות תעזור לכלל הזוגות הצעירים ממעמד הביניים ומטה באופן שווה, אף על פי שסביר להניח שתגרום להקפצה של כלל מחיר הדירות.

.ותודה לחבר מרכז הליכוד עובד חוגי שהעיר את עיני בנושא זה.

Translation, and I will put in my notes in italics:

VAT = Zero Solution

Zero VAT – A solution for the housing shortage, or a deepening of the divide in favor of the rich?

Immediately he starts off here on the wrong foot, talking in terms of class warfare between rich and poor, in a classic Marxian antagonistic sociological setup.

I have already made clear my position that the root of the housing shortage problem is the shortage of land for building purposes. As long as the State holds 93% of the land and will not sell it, the price of housing will continue to rise.

Spot on, nothing wrong with that sentence.

It is clear that Lapid’s proposal for zero VAT on new housing projects will not  create a single new apartment and will only raise housing prices.

Right on the first part, wrong on the second. Getting rid of the VAT will not create any new apartments than otherwise would have been built because consumption taxes do not affect the price of goods directly. Only supply and demand does, and taxes are never passed down to the consumer. They can only be passed up to land and labor factors, ultimately. Will zero VAT raise housing prices? Certainly not. Housing prices will be unaffected because VAT has nothing to do with supply or demand directly.

We must parse out land for building for free to anyone who completes military or civil service on the periphery on the condition that he builds on the land within a reasonable time frame. We should build cities like Modi’in in the Shomron Valley and the Judean Hills. Raising the supply of apartments will lower the price.

Mostly good, except I wouldn’t condition it on the completion of any service to the State. To hell with serving the State. Anyone at any age who wants to build anywhere should build there, anything, anytime, on any virgin unsettled land, period. Just announce that this is now legal, and you’ve solved the entire problem.

It is clear that Finance Minister Lapid’s  proposal for zero VAT will not create a single new apartment and will only raise prices. But together with this, I now understand that the proposal is much worse in what it says socially since it broadens the gap between rich and poor substantially.

Oh no! Moshe is talking like a politician now. Anyone talking about “the rich” and “the poor” and “the gap” between them is trying to be a social engineer through tax policy, and that is not good. But here’s where it gets bad:

For example, a couple with the wherewithal that buys an apartment for 1.6M NIS will get a benefit of 288,000 NIS from this bill. That’s compared to a couple on the periphery that buys an 800,000 NIS apartment and will only get half of the benefit, and so Lapid widens the gap between rich and poor by another 144,000 NIS. Worse, the tax benefit is only for those who buy new apartments, but those who cannot and only buy a secondhand apartment for 300 or 400,000 will not get the same benefit and therefore the gap between these families and the ones that buy a new apartment for 1.6M NIS will be 288,000.

Wow. That sounds like it came right out of Shelli Yechimovich’s textbook, or one of Amir Peretz’s stump speeches. It is quite bad. Here’s a reductio ad absurdum: Lapid proposes to get rid of all VAT for everyone on everything. No more sales tax on anything period. Now, a couple that buys an apartment for 1.6M will get a benefit of 288,000. Compare that to a couple that buys a house for 800,000. That couple only gets 144,000 in tax benefits. Worse, rich people buy a lot more stuff than poor people, so getting rid of sales taxes will widen the gap between rich and poor.

The basic fallacy here is taking the post tax status as the natural one, and then treating the tax-free status as some artificial benefit. Worse, it is assuming that VAT affects the price of goods directly, and Feiglin contradicts himself. He says it will raise the price of houses, but that the rich couple will get a benefit? How can it be both? Either the price will rise, or the price will fall and there will be the benefit. You can’t have it both ways. The price will not fall, there will be no benefit in terms of prices, only in terms of the amount of profit that the homebuilder can take home, and then use that to build more houses, which would in theory lower the price if the government didn’t own 93% of the freaking land supply. 

The price is the price regardless of how much the government rakes from the top. It will not change if you take away VAT. so there is no direct benefit for anyone except the home builder, not the buyer. Backward, never forward. 

Cutting taxes in any case is not a “benefit”. It is not a benefit. It is JUSTICE.  If someone steals less from you, that doesn’t widen a “gap”. All it means is that overall, less theft is going on, and that’s good. The government’s job in a miarchist society is not to maintain a gap at a certain maximum level. If that were true one could just steal money from anyone above a certain income and subsidize anyone below a minimum. That would at once maintain a gap and destroy the country pretty quickly at the same time.

The richer people are, the better off everyone is, assuming the money did not come from the political means, meaning direct government money taken from plunder. The richer people are, that means the more they are providing for people’s needs, which means the richer EVERYONE is. A profit means there is a demand for something, so keep making it until the supply grows to the point where there is no more profit, and then move on to something else. Screw the gap, the gap doesn’t matter, and it should not be Feiglin’s goal to engineer a gap to a certain size. What matters is how much money is kept by the people who work, versus how much is stolen by the people who rule over them. 

Lapid’s proposal for zero VAT on ANYTHING should be supported. Whenever a government official wants to lower taxes for anybody at all, that is a good thing. It doesn’t matter for who. Is it a perfect proposal? Absolutely not. But it lowers taxes, and therefore Feiglin should support it. If we start nitpicking that we don’t like a tax lowering proposal because it doesn’t lower taxes the way we want, we will never shrink the state. 

Final note: Feiglin makes mistakes sometimes. It’s OK, he doesn’t make many, and a few here and there is understandable. But everyone should know that I am no cult follower of anyone whatsoever and I will point out when the people I support make mistakes. It is actually a source of relief to know that despite my fire about these things, I am no true believer.

I have contacted him on the matter and he answered that he was writing from within the conceptual framework of Lapid, not his own. Well, OK. But to me that wasn’t 100% clear from the post.