AEI’s Perry Ignores the Unseen

In his classic essay, What is Seen and What is Not Seen, Frederic Bastiat remarks, “There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” The American Enterprise Institute’s Mark J. Perry finds himself on the “bad” side of Bastiat’s divide.

Perry concludes from a CBO federal income tax report that, “’the rich’ are paying beyond their fair share of the total tax burden, and we might want to start asking if the bottom 60% of ‘net recipient’ households are really paying their fair share.” But there is more to class analysis than taxes. Other government interventions lurk in the background, infecting every economic transaction.

Perry does have a point where federal income taxes are concerned. “After transfer payments, households in the bottom 60% are ‘net recipients’ with negative income tax rates, while only the top two ‘net payer’ income quintiles had positive tax rates after transfers in 2011.” The income tax burden falls heavily on the higher income quintiles.

But the tax code is far from the only factor that determines whether or not a particular quintile pays its “fair share.” To determine this, we need to move beyond vacuous political rhetoric like “fair share.” While greedy politicians endlessly and manipulatively repeat the phrase, it’s unclear what people — including Perry — even mean when they use it.

The economic relationship between the quintiles is the real issue. It’s clear where AEI’s thought leaders stand. They view the relationship between the upper and lower quintiles as one of exploitation, where certain quintiles extract value from the others. They just have the relationship reversed.

In a freed market, the relationship between quintiles (to the extent that they would exist) would be symbiotic, characterized by mutual self-interest and mutual gains. After all, an exchange only happens in a freed market when both parties expect to benefit. People free to dispose of their own property and make their own choices naturally engage in cooperatively advantageous trade.

When coercion enters the picture, the story changes. When force is introduced into a previously voluntary transaction, the relationship becomes one of exploitation rather than mutual benefit. And the fact is that we don’t live in a freed market. We live in a market dominated by state violence.

While the federal tax code is skewed against the rich, the great majority of other government policy has the opposite effect. Most laws that lurk in the background of the economy promote the concentration of economic power in the hands of a few, politically entrenched rich cronies.

Monetary policy rewards the first receivers of new money (big banks) at the expense of everyone else who face higher prices once the new dollars trickle down to them. Intellectual property protects artificial rights and prevents newcomers from competing. Zoning laws, licensing restrictions, safety regulations, capitalization requirements, and other kinds of red tape impede competition and benefit already existing, larger firms at the expense of smaller firms, potential newcomers, start-ups, and alternative forms of employment. The list goes on.

That state is responsible for structural inequality, but tricks free market advocates into blaming the wrong income quintiles with secondary policies (like taxes and transfers). Perry focuses on the seen effects of current tax policy, ignoring the largely unseen effects of other, background government interventions that prevent would-be competition and would-be innovation. Statist cronyism and wealth-concentrating policies continually stifle the would-be free market and far outweigh the effects of after-the-fact taxation.

Translations for this article:

Anarchy and Democracy
Fighting Fascism
Markets Not Capitalism
The Anatomy of Escape
Organization Theory