Price floors, such as those on labor (minimum wage), cause goods/services to cost more than they are worth (if the floor is higher than the product's true value). For this reason, people cannot afford to legally engage in these transactions, resulting in slew of malinvestment or underground dealings in the black market. While this kind of black market causes goods and labor to be sold lower than their legal price, the common black market results from price ceilings and allows goods and labor to be sold higher than their legal price. For example, milk might be limited to $3 a gallon, but if because of inflation or high demand, its true value is $4 a gallon, then sellers and buyers are going to try and find its true value on the black market. So in this example, milk is legally underpriced by 25%. The amount affected by price ceilings in the legal market varies per individual product, but let's say the percentage stays about 25% underpriced.
So now, if the opposite occurs, and a sales tax makes every product 7% more expensive, then there should be a black market for these goods. This includes the taxes on labor. But the legal risk involved is not worth the 7% savings, especially since all of the competition must also overprice their goods/services 7%. Minimum wage on the other hand, affects labor differently because some labor is below the wage. If a job is worth $4 an hour, but minimum wage is $8 an hour, then the emplyer must either take a hit by substituting labor with machinery or higher skilled labor and risk going under, or engage in illegal labor. Minimum wage therefore affects some employers more than other employers, and even though the "tax" goes to the employee rather than the government, the employer doesn't care. If he hires the overpriced laborer, he must pass this tax onto his customers who might find that they no longer are willing to pay for the good/service or are willing to substitute the good/service with another good/service that isn't affected by minimum wage (because let's say it consists of automated production or higher skilled labor).
So, the sales tax is like the minimum wage and other floors, but it is a percentage, not an amount--so it does not affect some goods/services more than others. It is similar to how price ceilings usually follow a percentage rather than a set amount for all goods; but ceilings are usually only for selected goods, even though those selected goods are hard to substitute. Still though, it seems there should be more of a black market for products, especially for the more expensive products, where that 7% means a lot more. Let's say the sales tax becomes 50%, then wouldn't there be a black market for all goods? Wouldn't it lead to self-sufficiency like in the stone age?
Also, how do minimum wage law, welfare, and the progressive income tax relate? They all discourage labor/production. Minimum wage puts a tax on low skilled workers, progressive income tax puts a tax on wealth production, and welfare puts a tax on low paying jobs because it is more profitable to collect welfare.
1) Higher prices do not lead to shortages.
2) You think there isn't a black market for high-priced goods?
I didn't mention shortages anywhere so I'm not sure what you're referring to. I asked why there isn't more of a black market, or in other words, what would a drastic increase in the sales tax result in? It seems the affect would be that of a price floor, where you could not afford the transaction and would have to do things yourself, like pump your own gas and make your own clothes, or operate illegally.
aureate:the common black market results from price ceilings and allows goods and labor to be sold higher than their legal price. [...] I didn't mention shortages anywhere so I'm not sure what you're referring to.
I didn't mention shortages anywhere so I'm not sure what you're referring to.
So...you're under the impression that people decide to break the law and buy things in an "underground black market" at a higher than legal price because...what? They're just thrill seekers who also like to pay more for things?
I asked why there isn't more of a black market, or in other words, what would a drastic increase in the sales tax result in? It seems the affect would be that of a price floor, where you could not afford the transaction and would have to do things yourself, like pump your own gas and make your own clothes, or operate illegally.
Well how much of black market do you think there is? How much of one should there be? And more importantly, how exactly are you getting those two figures?
The black market is the result of price ceilings not higher prices. The implementation of price ceilings might be a response to higher prices though, but I'm not getting that anyways from what I wrote.
It doesn't matter what the exact figures are, or would be, on illegal transactions; it would be impossible to find. I'm wondering what incentives would change and how that would effect the economy. In some sense it's like trying to depict what would occur if there was 100% income tax. People would still have to eat and live, and so would they do everything themselves? Or would they just ignore the tax? Would it even be worth enforcing? Where would the money come from to enforce it if no one is working?
aureate:The black market is the result of price ceilings not higher prices.
Riiiight, right. You're almost there. Now if a price cap (meaning an artificially low price, as you said) is the catalyst for a black market, are the black market prices going to be higher or lower than that limit?
It doesn't matter what the exact figures are, or would be, on illegal transactions; it would be impossible to find.
Bingo. So if you have no real idea how much black market activity there is, how exactly are you in a position to say that the amount that is occuring is too little? And even more, how are you in a postition to say how much there should be?
I'm wondering what incentives would change and how that would effect the economy. In some sense it's like trying to depict what would occur if there was 100% income tax.
Art Laffer graphed this in the 80s. :)
Seriously though, what kind of question is that? Obviously there would be no tax revenue generated at all. Yes, people would ignore the tax, or evade it, or revolt against it. Why would anyone work if they kept nothing? Even slaves got to eat some of what they sowed.
If I'm now almost there, I'm unaware of it because I don't know what has changed from the previous posts. If the black market prices were to be lower than the ceiling, there would be no point in operating illegally.
aureate:If the black market prices were to be lower than the ceiling, there would be no point in operating illegally.
Okay...and one more step: Why would someone be willing to break the law, to pay a higher price for something?
The higher price must actually be a lower total cost, meaning that the transaction costs involved in purchasing the product illegally are actually less than purchasing legally. For example the transaction costs for the former might involve driving to a far away house and risk getting caught, but compared to waiting in line for hours, it is worth it--so much so that people will pay the higher price.
We were so close!
Price caps lead to shortages. This is why black markets develop. This is why people are willing to pay more...because it's the only way they can get the product. Your whole thing was "why isn't there more of a black market if there is a 7% sales tax making things more expensive?" And my point #1 was, at least the products exist, and 7% is not that much....and when the normal price of the good is high enough that it does make a large difference, most of the market is already priced out at the normal price anyway.
But more important was the #2 point, as I've asked you, how do you know how much of a black market there actually is? And even if you could know that, how are you in a position to say if its the "correct" amount?
So now, if the opposite occurs, and a sales tax makes every product 7% more expensive, ...
http://mises.org/rothbard/mes/chap12c.asp#8D._SI_General_Sales_Tax