A free lunch for you is a painful cost for someone else
Beware governments bearing gifts and offering tax cuts. Remember that “society” isn't going to pick up the tab - you are.

Jamie Whyte

Children are selfish. Not because they are unkind (though many are) but because they believe in cost-free transfers. They do not understand that providing the toys and other amusements they demand imposes a cost on their parents. Children live in a fantastical world where Barbie dolls and trips to the zoo can be delivered without depriving their parents of something they might have enjoyed, such as a bottle of wine or a few extra hours off work.

Learning that cost-free transfers are impossible is an important part of growing up, and parents usually make sure it happens quickly. Most of us learn that there is no such thing as a free lunch long before we have ever picked up a bill.

Except when it comes to public policy. Encouraged by politicians, many adults indulge the infantile fantasy that the Government can bestow gifts on us while imposing costs on no one.

No one asserts this plainly, of course; that is never how nonsense is promoted. As usual, the fantasy is insinuated by a special way of talking. Politicians and commentators demand that corporations, markets or societies carry various burdens, never pausing to note that the cost must ultimately fall on the individual people who make up these abstract entities.

During the presidential campaign, Barack Obama derided John McCain's plan to lower the corporate tax rate, claiming this would mean tax breaks for “some of the richest companies in America”. To an economic child, taxing companies sounds like an obviously good idea. Who cares about companies? Can a company be hungry, homeless, uneducated? Will you put the interests of these wealthy inhuman entities ahead of real, flesh and blood people, many of whom are struggling to make ends meet?

But companies cannot be rich or poor; only the people who own them or work for them can be. Nor can the cost of taxation fall on a company; it must ultimately fall on the company's owners, employees or customers. Before you can tell whether corporate tax is a good idea, you need to understand who bears the cost and how it affects their behaviour. Once you do, it turns out that taxing companies is a bad idea.

Research shows that the cost of corporate tax falls more or less evenly across a company's shareholders (in lower dividends), employees (in lower wages) and customers (in higher prices). So, in terms of the “social justice” so beloved of the Left, corporate tax is no better than a combination of income and sales taxes.

But, in terms of efficiency, it is worse. Research also shows that corporate tax has a greater “deadweight cost” than both income and sales taxes, because it discourages the allocation of resources to productive uses - in other words, it discourages investment.

Markets are another, increasingly popular, fantastical bearer of costs. The current financial crisis, we are told, was caused by “unfettered markets”. Fetter them! Alas, you cannot fetter a market. Markets are nothing but places (sometimes “virtual” places) where people enter into voluntary transactions. You can fetter a market only by fettering those who participate in it. You must dictate the terms on which they may do business with each other or conditions they must meet to participate in the market.

Market fetterists claim their shackles protect the vulnerable. That sounds plausible only if you ignore the effects on individual market participants. Complying with regulations imposes a fixed cost on businesses. It thus disadvantages small firms, creates a barrier to market entry and stifles the competition that delivers the best deal for consumers. In short, it shafts the little guy. That is why large incumbent firms lobby politicians to increase market regulation.

Markets and companies may be fashionable sources of economic and moral delusion but society is the perennial favourite. Its imagined godlike power as the provider relieves its secular supplicants of any shame. For example, no one believes that, just because they live next door, the neighbours owe them £70,000. But almost everyone believes that society owes their children an education, despite a state education costing £70,000 and society being nothing but a collection of neighbours.

When it comes to bearing costs, there are no companies or markets or other aggregations of people. Costs are always borne by individuals. That is what Margaret Thatcher meant when she denied the existence of society: “They're casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people.”

Denying people morally convenient fantasies makes them angry. That is why Baroness Thatcher's simple observation has always caused such outrage and why David Cameron's new, pandering Conservative Party has repudiated it. It is a shame they are not capable of more honesty. Many people today wish to offload rather than repay their debts. No one should indulge the fantasy that this can be achieved without imposing the cost on other individual men and women.

Jamie Whyte is the author of Bad Thoughts: a Guide to Clear Thinking

http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5200299.ece