Price Versus Cost

Townhall.com ^ | April 17, 2013 | Walter E. Williams

[Kaslin]

Suppose you buy a gallon of gas for $3. How much did it cost you? You say, "Williams, that's a silly question. It cost $3." That's where you're mistaken, because there's a difference between price and cost. To prove that price and cost are not the same, consider the following. Suppose you live and work in New York City and routinely pay $15 for a haircut. Imagine you were told that there's a barber in Boise, Idaho, who can give you the identical haircut for just $5. Would you start going to the Boise barber? I'm betting you'd answer no because even though the price is cheaper, the cost is greater.

We might think of price as the money that's actually given in exchange for the transfer of ownership. When you purchased the gallon of gas, you simply transferred your ownership of $3. What the gas cost you is a different matter. One way to determine the cost of a gallon of gas is to ask yourself what sacrifice you had to make in order to have $3 to buy it. Say that your annual salary is $75,000. Your total federal income tax, state income tax, local taxes and Social Security and Medicare taxes come to about 35 percent of your salary. That means that in order to purchase the $3 gallon of gas required that you earned about $4.60 in order to have $3 after taxes. That means a gallon of gas costs you $4.60 worth of sacrifice. But that's not so costly as it is to a richer person -- for example, someone earning a yearly salary of $500,000. He has to earn more than $5 before taxes in order to have $3 after taxes to purchase gas.

If taxes only concealed hidden costs of what we buy, we'd be lucky, but taxes are destructive in another hidden way. Suppose I want to hire you to repair my computer. Having the work done is worth $200 to me, and performing the work is worth $200 to you. The transaction occurs because we have a meeting of the minds. Suppose Congress imposes a 30 percent income tax on you. That means that if you repaired my computer, you would receive not $200, what it was worth to you to do the job, but instead $140 after taxes. You might say the heck with repairing my computer; spending time with your family is worth more than $140.

You might then offer that you'd do the job if I paid you $283. That way, your after-tax earnings would be $200 -- what doing the job is worth to you. There's a problem. The repair job was worth $200 to me, not $283. So it's my turn to say the heck with it.

This simple example demonstrates that one effect of taxes is that of destroying transactions and hence jobs. But politicians have what economists call a zero-elasticity vision of the world. In other words, they're fool enough to believe that people will behave after taxes are levied just as they behaved before and that the only effect of a tax is to bring in more revenue. Of course, a more flattering assessment is that politicians are not fools and know that their actions destroy transactions and hence jobs but they don't give a damn and only care about revenue.

Here's a question: Would you and I, as well as our nation, be better off if you repaired my computer and I gave you $200 in cash and we agreed not to report the transaction to the agents of Congress? I'd answer yes and no. Yes, because there'd be more transactions, more jobs and greater wealth. No, because we'd be criminals.

Taxes are necessary to fund the constitutionally mandated functions of the federal government. If Congress spent according to its authority under Article 1, Section 8 of our Constitution, taxes wouldn't be any more than 5 percent of the gross domestic product, as it was between 1787 and 1920, as opposed to today's 20 percent.

[JoeProBono]

[FoxInSocks]

Very interesting perspectives. Thanks for posting!

[Portcall24]

A simply explanation regarding the impact of taxes.

The article points out “Would you start going to the Boise barber? I’m betting you’d answer no because even though the price is cheaper, the cost is greater.”

While this is true it is based upon the economic concept of time-place utility. People pay $8.50 for a small beer at an NFL game because at that time and place that’s what you have to pay based upon it being the only one available. Airports are famous for that. Service stations close to Interstate highways get more for gas because of the convenience of the place and foregoing the expenditure of time to explore for cheaper gas.

[knarf]

I sometimes have a hard time listening to Walter because of what I feel is a halting speech pattern, which is not to detract from his brilliance rather, my ability to listen to him.

READING him is a lot easier and ... yep ... this is always a welcome compare/contrast.

[knarf]

Capitalism comes in many forms.

[C. Edmund Wright]

What you said was absolutely true, but I have to ask - since I interpreted your post (maybe incorrectly) as somewhat challenging to the Williams premise - were you under the impression that you covered something not understood.

[C. Edmund Wright]

I was telling someone just yesterday that Williams was in one way, the best sub host ever for Rush - but in another way, he was not. His show was awesome, the problem is, it was the very same show everytime Williams hosted it (probably why he only subbed on Friday, and never two days in a row).

[Portcall24]

I was not challenging the Williams premise at all but simply, I thought, enhancing the concept of cost. Please forgive me if I was utilizing allocated bandwidth.

[lepton]

My recollection was that the best days were when Walter Williams had Thomas Sowell on.

[C. Edmund Wright]

He had Sowell on every single time he subbed I believe....and yes, it was great, but it was the same show. I mean, I always listened...

[C. Edmund Wright]

...I believe you will see I made allowances for that possibility in my post.....

[bgill]

No, because we'd be criminals

No, the PC term would be "undocumented transaction" so we should be able to make all the undocumented transactions we wanted and the government should give us free perks for doing so.

[Sicvee]

I have the same reaction to Michael Medved (whom I agree with only part of the time). His speech patterns are irritating.

[Colinsky]

Politicians have what economists call a zero-elasticity vision of the world. In other words, they're fool enough to believe that people will behave after taxes are levied just as they behaved before and that the only effect of a tax is to bring in more revenue.

Williams explained it in a previous essay:
"In 1990, when Congress imposed a luxury tax on yachts, private airplanes and expensive automobiles, Sen. Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share of taxes.

"But yacht retailers reported a 77 percent drop in sales, and boat builders laid off an estimated 25,000 workers.

"Kennedy and Mitchell simply assumed that the rich would behave the same way after the imposition of the luxury tax as they did before and the only difference would be more money in the government's coffers. They had a zero-elasticity vision of the world, namely that people do not respond to price changes."

[vannrox]

Americans are being eaten away at by a trillion tiny little bites. The huge excise taxes on transactions and gasoline all add up. You can easily see the result of this in the cost of everyday items.

Here in China, I bought a bag of 25 tomatoes from the local grocery store. It cost me 6.9 yuan ($us 1.09)

I do not know what the cost of tomatoes is in the USA, but I do believe that it is much more expensive.

All these little taxes all add up, and makes living a very expensive thing indeed. It is because of these taxes that fresh foods are more expensive than canned foods.

But, taxes aren’t the only problem. part of it is corporate greed, and government compliance in the enforcement of corporate monopolies.

Look at Viagra. In the USA, you have to go to a doctor to get a prescription to get it. Then pay between $us 10 to $us 20 per pill depending on whether it is generic or not.

In China, as in most of the rest of the world, you buy it over the counter. Not just in pharmacies, but also in places like supermarkets, restaurants, and 7-11s. It cost $us 0.02 per pill to make, and you can buy them here in China very Cheaply for off-brand versions. Often on the order of $us 0.50 pill.

Americans have become slaves. Instead of being chained to Roman overloads, Americans are chained by the links of taxes and an ever spiraling out of control debt.

[expat_panama]

Americans are chained by the links of taxes and an ever spiraling out of control debt.

That's more easy to say than to verify. 

True, federal debt's soaring, but private debt's been falling for years.   Likewise, even while we've been having increased tax rates the actual revenue's been falling.   I paid far more in taxes eight years ago and was able to create wondrous new wealth.  These days I pay virtually no taxes and have to settle for simply living well amid hostility. 

The problem I'm seeing now is divisiveness; America has turned on itself.

[supercat]

They had a zero-elasticity vision of the world, namely that people do not respond to price changes.

To further illustrate the leftist perception of reality: if someone were to propose cutting the tax in half, not only would leftists would say that the government couldn't afford it, but if sales of the goods in question were to go up tenfold the Democrats wouldn't see that cutting the tax rate had actually increased revenue 400%, but would instead see that the tax cut had cost ten times as much as predicted.