Students would do themeselves a favor by reading some of the posts (arguments) by economists in response to Steven Landsuburg's initial post of how taxing a rich millionaire who consumes nothing and simply spends his time parking and re-parking his cars in the driveway does not adversely affect the rich man. Instead, given Landsburg's assumptions, it is a tax on current consumers of goods and services. Tabarrok; Mankiw; DeLong; Krugman
Landsburg, in response to a journalist's opinion, argues accurately that taxing some idle rich heir to some fortune to the tune of his total money holdings of $84 million does nothing to adversely affect him, but instead will adversely affect anyone whose current consumption will be altered by the government's use of that money to purchase goods and services.
Let me explain. First, think of fiat money as a claim on goods and services only. In other words, it has value in exchange only; there is no value in use. Therefore, it is not wealth, but simply a claim on wealth. Second, Landsburg is arguing that, given the millionaire is not exercising any of his claims on current consumption (i.e., he's not buying anything, just parking his cars like some idle rich schlub), should the government confiscate his dollars (i.e., claims on current consumption) and begin exercising those claims for its own consumption, then the prices of the goods and services that the government purchases will increase, ceteris paribus, making consumers of those goods and services - not the millionaire - bear the incidence of the tax. We consume fewer resources because the government is using the rich man's money to exercise claims on current resources. And, since we can't have it all, by default someone else must consume less.
This may not seem realistic, but let me make it so. Suppose a rich millionaire hoards loads of cash - $100 million worth stashed in his closet and he rolls around in it every night. (It could be in the bank, which brings up different scenarios, none of which alters Landsburg's argument, but let's keep it simple.) This millionaire is a lonely and isolated old man who never had a wife and kids, and all of his immediate family died long ago. Let's say that he suddenly and unexpectedly dies in his sleep, leaving his stash of cash to no one. If the government now taxes all the dead rich man's money and uses it to increase current government consumption, purchasers of goods and services that the government is now competing for using the dean man's claims are made worse off in the form of higher prices and therefore reduced consumption. The dead man is not affected at all.
Landsburg's argument is premised on the fact that the journalist considered it a benefit to the rest of us if the government confiscated all of the idle rich man's money (his claims) that she reported he never spends and spent it. She assumes that, much like residents of Florida benefit when that state's legislature imposes taxes on out-of-state travelers to that state to fund new roads, schools, and other government goods, taxing this rich guy provides us all free goods at the expense of the rich guy.
What this reporter fails to understand is that just because the idle rich man's claims are confiscated, it's not apparent that we benefit. Those claims, which by the reporter's assumption, had been sitting idle and not competing with you and me to purchase things like gasoline, wood, metal, food, clothing, etc., will now be exercised by the government to increase consumption on current goods and services. Consequently, the prices of goods and services that we currently consume privately will be driven higher. We, not the idle rich man, bear the incidence of the tax in the form of higher prices. Therefore, the government "stuck it" to us, not the idle rich man.
Given the way government wastes resources, we would all have been much better off to instead burn the money in a large bonfire, therefore it will never compete with me for the purchase of goods and services I presently buy and consume.
Lastly, this is important to consider when you hear or read things like "America Lost $10.2 Trillion In 2008." We didn't.
Insofar as houses totaling $10.2 trillion did not all of a sudden vanish, no wealth was lost, at least in the aggregate. Wealth was certainly transferred from some people to others, but it was not "lost." If I paid $500k for a home in 2005, and the value of that home fell to, say, $300k by 2008, either that home was never worth $500k (i.e., the opportunity costs of the land and other resources used to build the home always totaled $300k) and the seller of that property made off with a $200k bonus from me, or the home is still worth $500k. In either case, no wealth was destroyed.
If I sell the home today for $300k, the buyer either pays $300k for a home with a replacement cost of $300k, which means the seller from whom I purchased the home benefitted by $200k, or this new buyer pays $300k for a home worth $500k, therefore realizing a $200k surplus. No wealth was lost, at least not in the aggregate.
I would argue, however, that there was indeed a loss of wealth due to the housing boom, but for a different reason. Artificially low interest rates produced a supply of new homebuilding with a value that was far less than the opportunity costs of the resources used to build those homes. Obviously, consumers valued the resources used to build those homes, now and into the future, less for homes today than for other uses of those resources, including uses into the future. (i.e., Think of trees and land that were cut down and cleared to build homes and produce new developments that now sit idle and empty.) The loss of wealth is in the fact that scarce resources were diverted from other uses, including future uses of those resources, to build homes today. The opportunity cost of these resources exceeds the value of the homes built, but this was concealed by artificially low interest rates, which skewed people's time preferences for use of available resources.