August 23, 2016

Does Your Supermarket Own Part of Your Income?

Donald J. Boudreaux

Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
Summary

You work and get paid. To whom do your after-tax earnings belong?

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You work and get paid. To whom do your after-tax earnings belong? Do they all belong to you or does some portion of them belong to the neighborhood grocer whose store you patronize? Who should have first dibs on the money you've earned: you or the auto dealer who sold you the last car you bought?

In both cases the correct answer indisputably seems to be “you.” But not so fast. Typical discussions of trade policy imply that the answers are “the grocer” and “the auto dealer.”

When politicians promise to raise tariffs on imports, they are promising to penalize you for spending too little of your money on products sold by domestic suppliers. The presumption is that domestic suppliers of steel, of textiles or of tires are entitled to a portion of your income. And if you, by buying goods from foreign suppliers, refuse to turn over that portion of your income to domestic suppliers, you must pay a penalty.

Clearly, supporters of tariffs believe that certain domestic producers have a higher claim on some portion of your income than you have.

Does there exist a legitimate justification for this belief? I think not, for none of us supposes that when we patronize a merchant we thereby encumber ourselves with an obligation to continue to patronize that merchant indefinitely.

Suppose that a new supermarket — call it “Jack's” — opens up nearby. Upon your entering Jack's for the first time, the owner informs you that a condition of your shopping at his store is that you must continue, each and every week from here on in, to spend at his store an amount of money that equals the amount of money that you'll spend on your first visit to the store. Would you accept? Surely not.

While nothing in law or ethics prevents Jack from demanding those terms, you'd find it intolerably burdensome to saddle yourself with such a legal obligation.

In fact, while it would be valuable for Jack to secure such a legally enforceable promise from you, he doesn't demand it because he knows that you'd not grant it. Or Jack knows that he'd have to offer to you something remarkably valuable in return, such as his contractual commitment to always charge you prices dramatically lower than those charged by rival supermarkets.

So in reality the deal is that by shopping at Jack's supermarket, you incur no obligation to continue to do so. If Jack wants your continued patronage, he must earn it.

Eventually an even newer supermarket opens just outside of town. This one's owned by Jill. Jill's selection is better and her prices are lower than Jack's. So you start shopping at Jill's supermarket.

Unhappy with your choice, Jack successfully lobbies the city council to slap a special tax on you for every dollar's worth of groceries that you buy from Jill's. You're penalized by the state for spending your money as you choose. The implicit premise behind this special tax is that Jack has a right to a portion of your income.

There is no difference whatsoever between this special tax and a tariff on imports.