The Graduated Gadinkus Tax; F. A. Harper

Alonzo's final calculations showed: Adjusted gross income Tax bill Left for himseH $300,000 194,804 $105,196 Belinda, his wife, tried to console him by pointing out that $105,196was no mean income, even if he had worked long and arduous hours. He agreed with this, but his ire was generated by the fact that he was going to have to pay the government $194,804-"fordoing nothing," as he expressed it. Belinda tried to console him further by observing that he did get something for the $194,804.'''You got all those services people get from their government," she said. Dr. Harper is a member of the staff of the Foundation for Eco nomic Education. [819 ] "True enough/' Alonzo replied. "We do get services from the government, even though we differ in what services we want and how much we are willing to pay for each of them. But aside from that, one gets these services whether his tax is $194,804 or $1,000 or nothing. In fact, some persons who pay no tax at all get food and other things that the rest of us have to buy for ourselves."

Alonzo's business is the making and selling of gadin kuses. A gadinkus is a hypothetical gadget Alonzo discovered after ten years of intensive study and experi mentation. Nobody else knows how to make it. The raw materials Alonzo uses to make the gadinkus are air, water from the brook that runs through his property, and heat from the sun's rays. He does all the work himself. The Market Price In the first year of operation Alonzo had sold gadin kuses at $10.00 each. Let us say that you had been his first customer. "How can you in good conscience charge me $10.00 for something made from .materials that are God-given and free?" you had asked. "I'm not charging you anything for the materials," Alonzo had replied. "If all you want is some of these materials, just step outside and take all you want for free. What I'm charging. for is my time in making the gadinkus, plus some return for the ten years of work discovering how to make something consumers want.

[320 ] Plumbers, you know, are now getting nearly $4.00 an hour around here." "I am setting my price by guess," Alonzo had con tinued. "I want to work steadily all year producing gadinkuses. If I have ·any left unsold at the end of the year, I'll know my price was too high and that consumers wouldn't pay this price for as many as I could produce. If, on the other hand, buyers queue up at my shop, I'll know the price was set too low." By the strangest chance, Alonzo happened to have hit exactly the free-market price for gadinkuses. In that year he produced 30,000 of them. Everybody wanting one for $10.00 or more was able to buy one. The last gadinkus was sold just before Alonzo closed his shop on December 31 to go home for his New Year's Eve dinner with his wife and two children. Pricing According to Cost It was the next day that he made out his income tax return and had his headache. The more he thought about it, the more the meaning of this tax system began to .form in his mind. He began to see clearly a new picture of how it affected him and his business.

Beginning on January 2 of the new year, he sold gadinkuses at $10.00 as before. Then at about 10:00 a.m. on January 5 he raised the price to $12.50 each. A lady buyer protesfed the new price, saying: ~1 just saw you sell one at $10.00 to the lady who bought one before I did!" [321 ] '''But it cost me more to produce yours than it did hers," Alonzo replied. "And I'm going to try to price gadinkuses so that my customers throughout the year will each pay the same price after taking account of changing costs. What consumers will pay, rather than precisely the cost, finally rules the market, of course. But unless a producer covers his costs, he can't stay in business long. And any how, it seems to me that the fair thing for me to do is to price them to my various customers equally in propor tion to the costs. That sort of 'equality' seems just, and I'm willing to help put it into practice in economic affairs."

"But," the lady replied, "your costs haven't gone up at all. Your materials are still free,· and it didn't take you a bit longer to make the gadinkus I want to buy than it did the one you sold to the other lady. Why, then, the jump in price?" "But my time costs more now than it did then," he countered. "Why?" she persisted. "In both instances it was all your own time. You can't just suddenly say your time is worth that much more." "It's not me saying it," Alonzo replied. "The govern ment says so." "How? You work for yourself and not for the govern ment. They don't set your wage." "I worked fully for myself from the beginning of the year till now," he replied. "But I am not allowed to do so any more. Beginning now I am forced to work one fifth of my time for the government. You see, from the [322 ] first of the year till· now my income was not taxed. Now it has reached a point where the govemment begins to take 20 cents out of every additional dollar I get. That is why I must charge you $12.50 in order to continue to have $10.00 left after the 20 per cent tax. If I were to charge you only $10.00, I would be selling it to you cheaper than to those who had bought earlier-much cheaper relative to costs of producing them."

Being unable to refute the fact, and being a willing buyer even at that price, the lady took it. She would have liked, of course, to have been able to get it for $10.00, just as the lady who had gotten one earlier for $10.00 would have liked to have gotten it as low as possible. Then on January 15 at about 11:00 a.m. the price took another jump. This time it went up to $13.51,as required to cover the new tax rate of 26 per cent applying to additional dollars of income, leaving him his $10.00 net after the tax. And he had to go through an explanation of taxes and prices all over again. Graduated Price Increases Again and again during the year Alonzo had to raise the price for the same reason-to $17.54 on February 6, to $26.32on March 24, to $40.00on June 8, and to $90.90 by the end of the year. And there were many other intermediate increases. Most buyers probably never did understand how taxes had caused the prices to advance. They just assumed it [323 ] was a personal "monopoly" grab by Alonzo. But no matter how they looked at it, those who bought gadinkuses did so because they were willing to pay the price rather than to go without. Others went without, of course, because as the price rose it became too expensive for them-just as a price of $10.00 or $5.00 or even $1.00 would be too high for some.

The demand for gadinkuses was such that-no matter what the price-about the same number of dollars would be spent on them by all people, or $300,000 combined, during the year. So as the price went up during the year, a corresponding number of buyers became discouraged from buying. Finally, at the end of the year, Alonzo was selling only about one-ninth as many gadinkuses in a day as he was at the beginning of the year. As sales fell off, Alonzo had more and more leisure time-time to sit on the seashore, or to enjoy other pursuits of his choice. Near the end of the year a lady asked him why he hadn't kept his price at $10.00 throughout the year, whereby all the gadinkuses he could produce by working full time during the year would be bought. "Look at all the additional people who could then have gadinkuses to enjoy," she said, "but must now go without." Alonzo replied that out of each $10.00 received at the end of the year he would be allowed to keep only $1.10 after taxes, as pay for his time. And he couldn't see why his time at the end of the year was worth any less than at the beginning of the year-still making the same product that people still wanted as much as ever.

"I look at it this way," said Alonzo. "If eight-ninths [324 ] of the pay for my time is going to be taken from me, I prefer to sit on the seashore or do something else. Why should I work nine times as long to get a dollar at the end of each year as at the beginning of the year? That doesn't make any sense to me, especially when the gov ernment takes some of these taxes to pay people not to produce things the rest of us want and are willing to pay for. I'll forego $1.10 and have the leisure rather than to produce gadinkuses and provide $8.90 in taxes to be used to induce someone else not to produce something I would like to buy." "After all," Alonzo continued, cCI don't see that it is my responsibility alone to solve this problem. Go speak to the others who want gadinkuses. I would gladly produce for them if we were allowed to do business directly with one another without this penalty. Have them help me solve it."

Well, they haven't solved it yet, and consumers are still going without gadinkuses they want and could have. FEDERAL TAX RATES Married Couple with Two Children, 1955 Income before tax (adjusted gross income) $ 2,672 12,000 30,000 70,000 132,000 300,000 [325 ] Tax on another dollar of income 20¢ 26 43 62 75 89 OUR PRINCIPLES OF FREEDOM MUST STAND tg G. Smglle gamtrell ~ FOR 300 YEARS the American people have cherished the spiritual concept that the rights of man to freedom are personal to him from the Creator, not from the State. It was written in our Declaration of Independence. This concept, to the extent that we have followed it, has guided us not only to a life of human dignity, but to material abundance. The great truths of humanity do not spring newborn to each new generation. They emerge from long experi ence. They are .. the gathered wisdom of the ages. They are renewed in times ofconHict and danger. In this sense, the current challenge to our political institutions may prove to be a kind of blessing in disguise. If the times in which we are now living do not bring a further under standing of the great traditions of our civilization and a deeper desire to affirm them, we are not worthy of our heritage.