How will we pay for it all?

@FreeDuck,

Dang. I had the answer for one question and she beat me to it. Thanks, Squinney.

@roger,

Ah there you are, roger. I was hoping you'd be along.

@FreeDuck,

I'm trying to put some thoughts together, while avoiding the political.

First thing that comes to mind is the obvious (to me). If you are going to pay for it (all that stuff), you have to raise revenue. If you don't, you just can't have it all. Alternatively, you can finance it by debt, leaving the question of who is going to pay or service the debt to another generation.

It does look like some of the confusion comes from a misunderstanding of the Laffer Curve. A tax rate of zero produces zero revenue. A tax rate of 100% also produces zero revenue, just because (barring black markets) nobody's doing anything to produce a taxable revenue. At any rate between 0% and 100% tax rate, there are two rates that will generate the same revenue. The lower rate stimulates economic activity with more revenue to be taxed. The higher rate inhibits the economy, but what there is, is taxed like crazy. Now, Laffer was looking at the effect of taxes on economic activity for a given revenue collection. He never tried to predict increased taxes from lowered rates.

The real way to get more of what we want is to make things better and cheaper than anyone else, or provide better service at a better price than anyone else. It isn't happening, generally, so I guess we just can't have it all.

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@roger,

roger wrote:

The lower rate stimulates economic activity with more revenue to be taxed.

The higher rate inhibits the economy, but what there is, is taxed like crazy.

Yep.

I think The FairTax plan and reduced federal spending combined with a shrinking federal government is the solution.

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@CoastalRat,

like that'll happen...

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@Bi-Polar Bear,

Bi-Polar Bear wrote:

like that'll happen...

No, not with that kind of negative attitude.

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@FreeDuck,

One argument for lower rates is that they discourage the rich from hiding income. Instead of sending it offshore to avoid taxes, they keep it here and pay taxes on it.

If I net $2 million per year and pay 36% tax I'll have to send the IRS a check for $720,000. If I send half of my net income off shore I only have to send the IRS a check for $360,000.

BUT, if the government lowers the rate to 20% I'll be sending the IRS a check for $400,000 of my $2 million, which is $40,000 more. Ta-Da! Revenue increase!

(Why I wouldn't still hide a million in the scenario above and only pay $200,000 in taxes is not clear.)

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@squinney,

Easy way to solve that is to penalize those who hide their income offshore, and remove the loopholes that allow it.

Cycloptichorn

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@squinney,

Another argument is that if the rate is lower, companies (conglomorates as well as small family owned) retain more money in the company coffer to keep prices low, buy more supplies, hire employees, etc. From buying more supplies they increase demand for whatever that supply is, which in turn means THAT company has more income, needs more supplies, hires more employees, and on and on.

More people are employed, so they are now paying income taxes, withholdings AND buying what the companies are making.

So, letting business keep more money eventually trickles on the rest of the population.

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@Woiyo9,

Quote:

I submit then we cancel all foreign aid,

You're already the stingiest country on the planet and you want to make it worse.

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@squinney,

Quote:

Another argument is that if the rate is lower, companies (conglomorates as well as small family owned) retain more money in the company coffer to keep prices low, buy more supplies, hire employees, etc. From buying more supplies they increase demand for whatever that supply is, which in turn means THAT company has more income, needs more supplies, hires more employees, and on and on.

More people are employed, so they are now paying income taxes, withholdings AND buying what the companies are making.

So, letting business keep more money eventually trickles on the rest of the population.

This argument is flawed because it assumes that the price one sells goods for is dependent on the manufacturing cost. The selling price is market driven. If you cut the taxes on my corporation, I just have more money. I'm not going to drop my prices unless there is competitive pressure to do so. I'm not going to hire people and increase manufacturing unless I'm sold out and my review of the market shows that there is room for additional capacity. (If my analysis of the market shows that to be the case, I will invest regardless of if you give me a tax cut or not.) If you want to see how this works, look at Microsoft and Exxon. Both companies are sitting on tons of cash right now. They aren't reducing their prices. They are sitting on the cash looking for good projects to spend it on. If there are no good projects, they won't spend it. They have their own definitions of a "good project", but it probably looks something like an IRR of 2 years. Since my spending is tax deductable, the tax cut doesn't even affect my project's IRR in a macro sense.

If the government had kept that money instead of giving it to me, maybe they would have improved the roads between me and my main customer. That would have directly hired Americans to do the work, given us a long term benefit (improved roads) and reduced my shipping costs, providing me with a real benefit as well. This is how a higher tax rate improves the economy on the upside of the Laffer curve.

1 Reply

@engineer,

Ah, but if all competing companies had lower costs, taxes taken as costs, someone might decide to go for greater market share.

Not disparaging your argument, engineer. It's a good one. and I'm not sure which psychology would win out.

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@roger,

roger wrote:

It does look like some of the confusion comes from a misunderstanding of the Laffer Curve.

I've yet to see a reliable graph of the Laffer Curve. The graph I have seen, shows a pretty linear relationship between tax revenues and tax rate. (As long as you don't believe the ridiculous graph that the Wall Street Journal put on its editorial page....)

http://economistsview.typepad.com/economistsview/2007/07/yet-again-tax-c.html

1 Reply

@roger,

Roger, what you say seems pretty intuitive -- I have played Sim City before. Nobody seems to have a clear idea of what those two numbers are for us. And the problem is, as always, that the devil is in the details, as you point out:

Quote:

Now, Laffer was looking at the effect of taxes on economic activity for a given revenue collection. He never tried to predict increased taxes from lowered rates.

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There are two principles at work here as we learned in Economics 101:

1) In a capitalistic society, wealth is not generated by government, but is rather generated by the private sector.

2) There are differences in short term and long term benefits to the people when services are provided by government versus the private sector.

Monies expended by the government can spur economic growth in the private sector, but that growth can be offset by the wealth confiscated from the private sector in order for government to expend the money. Government programs do create jobs in government, but such jobs do not produce wealth in the economy but rather drain from it. (This is not the same thing as saying that there are no necessary government jobs and/or that the people do not get their money's worth from necessary government work.)

Money expended by the private sector, however, must all be generated by providing products and services that the people need or want and in various ways generate wealth, jobs, new products, services, and industries. It is true that the goal is profit and even greed, but when Microsoft or Intel find a project that they expect to be profitable, they are liking to create many new jobs and generate new wealth on many levels.

This is how a booming economy, even though taxes are lower, can pour huge revenues into the public treasury, and how it can be profitable for both the government and the people for the government to take no more monies than it absolutely has to in order to perform the necessary functions of government.

.

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@DrewDad,

Quote:

I've yet to see a reliable graph of the Laffer Curve. The graph I have seen, shows a pretty linear relationship between tax revenues and tax rate. (As long as you don't believe the ridiculous graph that the Wall Street Journal put on its editorial page....)

http://economistsview.typepad.com/economistsview/2007/07/yet-again-tax-c.html

That is a hysterical set of graphs. If you only graph countries around the peak of the curve, you can't see it. You have to add in communist countries to get the data points at the other end of the curve. Still, common sense says that the curve has to exist. You know that at 100% taxation there is little incentive to be productive so government revenue falls. I think that you are correct in that the point where people give up on personal advancement is pretty far along the curve, so the curve is fairly linear early on.

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@Foxfyre,

Quote:

Monies expended by the government can spur economic growth in the private sector, but that growth can be offset by the wealth confiscated from the private sector in order for government to expend the money. Government programs do create jobs in government, but such jobs do not produce wealth in the economy but rather drain from it. (This is not the same thing as saying that there are no necessary government jobs and/or that the people do not get their money's worth from necessary government work.)

That growth can be offset does not mean that it will be offset. Infrastructure spending is a perfect example of a situation where the government spending is more than compensated for by the growth in the private sector. Education is another example. Government education programs do not drain wealth from the economy. They provide a dramatically more productive workforce that will then drive the private sector.

The other point that people often overlook is that a dollar spent by the government into the private sector drives just as much growth if not more than a dollar spent by an individual. If the recent $150 billion stimulus package had been spent on pulling in projects from our 2009 and 2010 infrastucture plans, that money would have gone straight to the private sector to provide building services resulting in new jobs and the purchase of US goods. By sending everyone a check instead, we ended up transferring private debt to the government (people using the check to pay down their debts) or supporting foregin economies as we purchased imported goods.

1 Reply

@H2O MAN,

H2O MAN wrote:

DrewDad wrote:

H2O MAN wrote:
Lower taxes result in increased revenues to the federal government.

Let's reduce taxes to zero, then, and our government will be rolling in it!

Or the government could give money away and then have even more money!

......

H2O, pls waste no time responding to dimwit DD (henceforth abbreviated to DDD) he only understands linear functions, not differential equations.

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@High Seas,

High Seas wrote:

H2O, pls waste no time responding to dimwit DD (henceforth abbreviated
to DDD) he only understands linear functions, not differential equations.

Roger that!

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@engineer,

engineer wrote:

Quote:
Monies expended by the government can spur economic growth in the private sector, but that growth can be offset by the wealth confiscated from the private sector in order for government to expend the money. Government programs do create jobs in government, but such jobs do not produce wealth in the economy but rather drain from it. (This is not the same thing as saying that there are no necessary government jobs and/or that the people do not get their money's worth from necessary government work.)

That growth can be offset does not mean that it will be offset. Infrastructure spending is a perfect example of a situation where the government spending is more than compensated for by the growth in the private sector. Education is another example. Government education programs do not drain wealth from the economy. They provide a dramatically more productive workforce that will then drive the private sector.

The other point that people often overlook is that a dollar spent by the government into the private sector drives just as much growth if not more than a dollar spent by an individual. If the recent $150 billion stimulus package had been spent on pulling in projects from our 2009 and 2010 infrastucture plans, that money would have gone straight to the private sector to provide building services resulting in new jobs and the purchase of US goods. By sending everyone a check instead, we ended up transferring private debt to the government (people using the check to pay down their debts) or supporting foregin economies as we purchased imported goods.

Your first point is quite right as I allowed in my disclaimer recognizing that there are legitimate necessary functions of government. Building necessary infrastructure for the common welfare would certainly be one of them. But the $150 billion stimulus package was on top of infrastructure allocations that could have been funded much more efficiently by simply shutting down earmarks for non essential things that elected officials use to bribe their constituency to vote for them. And less of the people's wealth would then need to be confiscated by government.

Confiscating a dollar from a productive worker and transfering it to a nonproductive person does not qualify as economic stimulus. That's as foolish as not wanting to give up federal oil tax revenues or increase oil production to bring the price of oil down, but wanting to send the people a $1000 check to help offset their energy costs.

But providing incentive to the productive to employ the jobless is a stimulus on several levels. Government policies that encourage expansion and innovations and investment and taking risk produce great economies, more wealth, more employment, less poverty. Government policies that excessively confiscate profits do not.

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