Thursday, February 18, 2010

Taxation

I know no one reads this blog, but I wasn't sure where else to write these thoughts. It's in my head and I guess I need to put it in words to sort out the thoughts properly.

So my opinion about fiscal conservatives is that they are supposed to believe in lower tax rates and less spending by the government. BUT (and this doesn't seem to be a very popular belief in the Republican or ESPECIALLY the Democrat parties) another belief I've heard many times and have tended to believe is this: If you lower tax rates, tax revenues will go up.

On the face of it that sounds silly and impossible, but I'm going to go through examples of why I think this could actually be true. But I don't know for sure. Does anyone?

But first, I was thinking about government spending. As the population of the US has grown (explosively), government spending has followed. Obviously more management has become necessary. And I could be wrong here (this is all just a rough theory) but it seems that spending per citizen keeps going up. Let's think about how other companies work. As a company grows, they buy more and sell more. Same with the government; they provide more goods and services and therefore must buy more. As a company grows, it becomes more efficient. True, more people doing more jobs means there can be more waste (time, etc), but the growth in efficiency outpaces that waste, otherwise a small company could make more money than a large company and no company would ever grow to be large. So theoretically, for every person a company hires, their profits go up. Part of that is because the more they sell, the more they need to buy. The more they need to buy, the cheaper they can buy things. Buying in bulk is cheaper. Quantity discounts rule in every sector of the marketplace. Even mine. If I could buy an entire shipping container full of coffee (250 bags = 38,000 pounds), I would get a substantial discount. Getting insurance for their people is cheaper in mass. Everything is cheaper the more you buy. So a larger company is able to operate, generally, more efficiently than a small one. In other words, they can do more with less (per). The government should work the same way. The larger the population becomes, the more buying power we have and the less it should cost each of us to operate efficiently. Since they're not a profit-oriented business, that would just mean they could reduce their income to match the reduction in expenditures, thus they would need less tax money from each of us to operate. Obviously that can't be an infinite model unless the fraction by which there is a percentage decrease lessens as the population grows. Which means it's possible there is virtually a rock-bottom price per citizen that is able to be achieved.
That's one theory.

Now, back to taxation. Here's how I think tax revenues could go up if tax rates went down. People generally spend all their money. If you let them keep more of the money they earn, they'll probably have incentive to work slightly harder (more return per hour= at the end of the day when you're tired and it's not worth it any more, a few more bucks might make it worth another hour's work). Workers may make more and spend more. Also, as things get cheaper you tend to buy more of them. For instance, if I'm buying tshirts to sell at DS, I get a price break at a dozen and 96. So I buy in those quantities. Also with stickers. Order 1000 and get one price; order 2000 and get them substantially cheaper. I order more. This is why at the grocery store they never say $1 off, they always say 2 for $2 cheaper. They want to make it a package deal. Buy more and save! Hell, this is the whole reason Sams Club exists.
My point is, it seems that people will spend the money they have and if things cost less, they just might buy more. If not more of what they already use, more stuff they haven't yet bought or don't usually buy. So if that savings came in the form of reduced taxes (sales tax especially), it seems that people might buy more stuff and the dollars they saved from the government would get spent and taxed anyway. And all those dollars that didn't go to the government would get passed around a lot more if more of those dollars stayed in the economy and less went to big brother. So if taxes suddenly went down on coffee, and it was slightly cheaper, you might come 6 days per week instead of 5. The increased income I received would go to (well, after hiring more employees to deal with increased traffic) (I think I just solved the jobs crisis) more steak, more whiskey, etc. So Grand Vin and Harvard Meat Market would get more of my money. And since the taxes there were less, I'd probably guy even more meat and whiskey. And they would make more money and with those profits they would...
You get the point.

Lower taxes seem to lead to an invigorated economy. Imagine what NO taxes would do.

The conclusion is that every time money changes hands, the government wants a cut. If the money changed hands more often or in greater quantities, the government would get a smaller percentage of more activity. Theoretically that would mean higher overall tax revenues because of economy stimulation. So I say they're doing it backward. Instead of the government body spending more money, they need to get all of our bodies out spending more money. That could happen by reducing the cost of spending money.

Furthermore, imagine those two things happening in tandem. Government efficiency creates a need for less tax revenues and less taxation leads to greater tax revenues. Maybe that's why they keep the tax levels where they are. It's too confusing trying to figure out how to spend less, charge less, and get more and then what do you do with the profits when you're a government? Reduce debt? Ridiculous.

1 comment:

TaxiDriver said...

Whether lowering taxes increases revenue depends on how you look at it. Lowering taxes decreases the ratio of revenue to GDP, so if you measure revenue in terms of percentage of GDP, then lowering tax rates lowers revenue. For this reason, those who are pro-big-government will favor raising taxes even though they know that it will reduce revenue, because it will increase the relative economic power of the government with respect to the private sector.

But when tax percentages are lowered, GDP goes up by a greater percentage than that by which taxes are cut, so while the government is taking less of a cut per transaction, the increase in transactions more than overcomes the difference. This happens because the velocity of money is increased.

This means that cutting taxes creates a revenue increase in terms of absolute numbers, despite the fact that tax revenue would be smaller as a percentage of GDP.

Taxi Driver
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