Tuesday, October 21, 2008

Taxes: Income of Government or Tool of Fairness?

I have tried to stay out of politics and focus only on the economic facts of an issue. I will do my best here as well but it is pretty clear in this election who is on which side on the issue of taxes. However, there is only one "right" side in my view and I hope it is evident to you as well when we are done here.

There are two schools of thought on taxes. The first, the one that the Founding Fathers believed in, is that taxation was income to be used to pay for essential government services enumerated in the constitution. The second view is that taxes should be a used to redistribute wealth or to enforce "fairness" between the haves and the havenots. There is really only one way that works and that is income for the government, because using the tax code to make things fair will actually hurt the very people you are trying to help.

As we talked about before, when the cost of something goes up, demand for that product or service goes down. A tax is simply a cost added to a product or service. When a tax is imposed on an activity, it leads to less activity. This is easy to illustrate in everyday life. When gas prices started to rise, the increase was like a tax that you didn't have to pay before. As that increase got larger, you tried to buy less gas. Maybe you bought a smaller car or started carpooling. You used less gas because it cost more. Its the same thing with income or sales or property taxes. The higher it goes, the less of that activity occurs.

An income tax is a tax on productivity. When taxes go up, people produce less. And actually, there is a point where if taxes were high enough, you wouldn't work at all. Just think about it, if you were taxed at 100% there would be no reason to produce. What about 90%, 80%, 70%? I would find it difficult to get out of bed everyday if that much of my money were going to the government.

Now for a quiz... what is it that allows people to earn an income to buy stuff? A job. What creates jobs? Wealth that can be invested in a business that needs employees. What creates wealth? Profit from that business. And finally, what creates profit? I know that you are saying to yourself "Why profit comes from an imperialistic country stealing from the poor people of the world." Sorry, silly socialist, but poor people don't have enough money to steal. Only rich people. So since stealing is illegal in rich countries, how do you separate money from rich people? You make stuff they want and sell it to them! That is called productivity. And if you tax it, you get less of it. Which means fewer happy rich people, less profit, lower wealth, fewer jobs, and you in the unemployment line where the government divvies out the tax revenue they took from everyone so as to make things fair for everyone.

So my point of all this is that the very tool the pro-tax crowd claims is supposed to help the poor and downtrodden is actually hurting them! The best way to help raise people's standard of living is to take the shackles off of productivity and allow wealth to be created unimpeded. Now I am not saying that this would eliminate poverty, because there will always be poor people for various reasons, often of their own choosing. But if we allow anyone who wants to change their lot in life the best chance to do it, then our entire society will benefit, even those that don't want to work. Just compare our "poor" to that of other countries that promote socialist policies. There is no comparison. A rising tide really does lift all boats. We have the highest productivity of any nation on Earth, and as a result one of the highest standards of living. Why in the world would we want to be like everyone else? We should ask this of our leaders as well...


re-Barr said...

Hey, if we "redistribute the wealth" enough, maybe we could have another tea party protest. Only this time it could be ipods.

pilgrim said...

"Sorry silly socialist", now that's funny! Wish I had something intelligent to add to the conversation but you said it all too well, plus being one of those non-productive unemployed guys looking for the divy, I am just far too offended to argue. LOL


el norteno said...

Very good, Kirk.

One question, though.

ARE we (still) the most productive nation on earth?

What about Israel? Or Japan? Korea?

Check out http://www.bls.gov/fls/


Kirk said...

Economists could probably argue over the best measure of productivity, but I have always used real GDP per capita (RGDPPC), since that is really the measure of total wealth that is produced.

For the last 50 years the US has been the solid leader with the exception of Norway. In 2007, the US RGDPPC was $43k, with the other top industrialized nations at least 15% behind. The one exception, Norway, at $49k has a mere 5 million people. Israel comes in at $28k, Japan at $32k, and Korea at $24k.

You also have to factor in tax rates, cost of living, inflation, interest rates, etc, etc, so its not cut and dried. But the proof is in the pudding...how many people are trying to sneak into Norway?

Tam said...

I am not currently trying to move to Norway but will consider it if Obama becomes president. Thanks for the info, I will need it in making my decision:)

Dennis D. said...

I kinda like taxes. I like them thumb taxes with the differnt color tops on em.