You've gotta give for what you take
You've gotta give for what you take
- George Michael
In a previous column, I wrote that there is a desirable level of tax* revenue for every economy and that it necessarily changes over time. It is found at the peak of the utility curve for taxation, which is a difficult curve to define.
Opposing the wings of this curve are the downsides to over- or under-taxation. But before considering the wings, consider that any money spent or invested by government is also, by definition, a tax.
The money transferred must at some time be repaid by the citizens of that government. So, whether it is financed through borrowing (which must be repaid with real dollars in the future) or printing money (which devalues the wealth of the entire nation somewhat equally), any form of spending is a dip into the pockets of taxpayers.
On the short side of the utility curve, one of two things is happening: 1) either the government is spending too much (per the utility curve), or 2) the government is not taking enough of a toll from its revenue sources. In either case, government debt grows, increasing overall leverage of a country.
We know from basic finance that higher leverage equates to higher risk, but how so in this case? If the amount of leverage increases to the point that the tax burden on a country's citizens become so great that productivity comes to a halt, the currency will free-fall against other currencies (and commodities!) as investors lose faith in the value provided by the country's workers. The government, of course, has to continue printing money and inflation spins out of control.
The gold bugs (and others — you know who you are!) that are betting on the demise of the dollar are predicting just this result. Many times in modern financial history have these "Debbie Downers" flexed their betting muscles, typically in the heights of recession, only to see those bets wither away as American ingenuity and entrepreneurship come bounding back.
On the long side of taxation, we also have one of two things happening: 1) either the government is not spending enough, or 2) it is taking too much revenue from its citizens. This scenario rarely occurs, especially in democratically-elected governments as the leaders entice their voters with locally targeted projects funded nationwide. However, we will leave a discussion of this scenario for another column.
What seems to be missing in this debate is the flipside of the utility curve. In other words, what is lost when we do not reside at the peak of the curve?
The answer is freedom and productivity.
When left to their own devices, consumers will find the most efficient and productive use of their funds by definition. If a 24-year-old electrician elects to take her $10,000 in savings, head to Las Vegas and try to become a poker professional, she obviously has chosen the path that maximizes her utility for investing not only her cash, but also her time and efforts.
If instead, this same 24-year-old has not been able to save any money over her career due to higher taxes, that same $10,000 has been put to work elsewhere in the economy. The place it has been put to work simply is being controlled by the government rather than the individual who earned it.
Now, to argue which scenario is best is to debate where we reside on the utility curve.
In the first scenario, this individual was able to pursue her dream at a very young age and, whether or not she is successful, her happiness is surely higher given she was able to choose where to invest her money.
In the second scenario, the government took that $10,000 and invested it somewhere else in the economy.
For the nation as a whole, which is best?
Surely it's good to have happy citizens and Americans absolutely value their freedom to shift and change careers even toward those with the greatest risks. But it is also true there is some necessary level of government spending that must occur.
So, how do we determine which is best?
I suggest one methodology is to analyze all government investing/spending and determine from your own personal point of view whether that spending is justified as if you are spending your own money, because in fact, you are.
This will alter the focus of the debate from receipts to outlays, providing every American a usable perspective from which to form his or her point of view.
Arguing that multimillionaires should be taxed at, say, 45 percent instead of 35 is a self-serving exercise at best. When determining whether to take money from someone else, we tend to lean towards taking it.
But arguing whether the government should spend $5,000 on a hammer or take 20 years to replace a bridge (ahem … San Francisco!) is something we can determine more clearly.
Surely, there are flaws to this methodology (who can fathom whether $100 million is a fair price for a fighter jet?), but if spending equals taxation, it seems to me the first step to educate oneself is to analyze the spending choices our government makes.
Key Developments The Fed's Federal Open Market Committee decided to leave the Fed Funds rate target unchanged at 0 - 0.25 percent as expected, and stated its intentions to keep rates "exceptionally low" for an extended period. Simply put, the Fed is not yet seeing signs of a significant recovery that would create inflationary pressures in the economy.
Third quarter non-farm productivity soared 9.5 percent as companies squeezed more production from fewer workers. There are two sides to this coin. The first is that increasing productivity is exactly what companies should be doing during and towards the end of a recession. The other side is that by increasing productivity, these companies can grow faster without adding workers, keeping unemployment high for a longer period of time.
The Department of Labor reported the U.S. shed 190,000 jobs in October and the unemployment reached a 26-year high of 10.2 percent. The biggest losses came from the construction, manufacturing and retailing sectors, while healthcare companies added approximately 29,000 jobs. Additionally, the number of temporary workers increased for the third consecutive month by 34,000, a sign that employers are expanding their businesses. Temp hiring is considered a leading economic indicator.
*For convenience, I am using the word tax to refer to all government revenue sources.
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