A short lesson on economics

If I hold a dollar bill in my hand does the dollar bill know who is holding it? Does the dollar bill know who is spending it or where it is being spent? In a recession we need people to spend money. We need a demand for goods and services. We need for people to have money and for them to spend that money. The dollar being spent doesn’t care about whom, why or where it just needs to be spent. In this current recession we need people to spend money. It does not matter whether it is the rich, the middle class or the poor person, they all need money and to have enough confidence in the future to spend the money they have.

What happens when people spend their money? If a producer of a product or service receives a dollar and spends that dollar it has a multiplying effect on the economy. First the producer received a dollar because he provided something the people wanted or needed and he fulfilled that need. If the dollar he received is spent at the grocery store then part of the dollar goes to pay the wages of a clerk (worker A). Another part goes to replace the product sold at the store. That part pays the wages of the driver (worker B) and the wages of the packer who packaged the product (worker C) and the wages of the production worker (worker D) who either made or picked the product at its source.

Now all these workers (A, B, C, and D) receive their wages and spend them in various stores paying the wages of a multitude of others representing many A’s, B’s, C,s and D workers. Over the year that dollar, that $1.00, has multiplied to pay the wages in the amount of $3.40. The more dollars that people have to spend the more dollars are multiplied and the economy grows. The more the economy grows, the greater the demand requiring more workers to produce more products to sell and more wages are paid and the cycle goes on and on.

In addition if the government collects 10 cent of every dollar spent then for every dollar increase that workers get to spend then the government actually gets 34 cents in revenue. Seeing that not every dollar a worker gets is actually spent (some is saved, pays taxes, etc.) government revenues actually doubles for every dollar given in a tax cut. This was proven by the Coolidge, Kennedy, Reagan and Bush presidencies. The reality of economics is that a tax cut will increase government revenues and a tax increase will decrease government revenues. Again history shows that the government revenues stay at about 19% of GDP (Gross Domestic Product) no matter what the tax rate is. It is the same 19% when the tax rate is 70% or at 25%. Knowing that fact common sense would tell you that it is best for the country to use the lowest tax rate possible allowing the people to pursue, life liberty and happiness because the government will get what they need anyway.

The main economic effect every time congress increases taxes on something is that people do things to avoid paying the tax. Tax boats and people will quit buying boats or buy a boat where they will pay no taxes. Increase Taxes on income and people will find ways to avoid paying taxes, all legal of course. The final result is less government revenue and the people building boats are now out of work (true story). People investing and making profits will quit investing and find other places to put their money. Then there is less money for businesses, capital and research and development. Overall more increased taxes means fewer jobs, lower wages and less for all.

Then the politicians call for more taxes on the rich. They can afford it they say. Yes maybe but it will still means he has less to spend. He has less to invest. Back to what I said at the beginning, the dollar does not care who is spending it or where it is being spent. When it is spent by anyone it creates jobs, it multiplies. History has proven over and over that lower taxes will grow the economy, create jobs, increase wages for all and increase government revenues. Everyone benefits.

This is really so simple that even a politician should be able to understand it. If politicians were really looking out for the people of the United States then they would look for the simplest, fairest way to impose taxes so the economy would grow so fast and so great that everyone who wanted to work could. The debt would be paid off quickly and America would absolutely again be the greatest country in the world. If a politician really cared about you and our country they wouldn't be talking about raising taxes and a gazillion programs to help someone. He would be lowering taxes and let everyone share in abundance we would have.

If your congressman or senator thinks he is doing you a favor by increasing taxes on anyone, if he thinks that cutting taxes is sacrificing benefits to some poor constituent then you need to think about what I said come election time. The only reason for our current tax system is to punish opponents or reward those who provide a benefit to that congressman or senator. It is to punish those who don’t agree with their ideology, or to pad their pockets and secure their future.

Americans deserve the best tax system in the world. We deserve the best job creating economy in the world. We have the means to do it. We have the ability to do it. We have the people to do it. If we just had real leaders in congress and the White House we could really do it. It is time to vote, but not just vote but know who you are voting for and why you are voting for them. Do they support a fair American tax system, American jobs or are they just looking for power? Do they represent capitalism or socialism? Do they support job growth or job control? They think you are stupid. This time prove them wrong.

Nubby

Simple Economics

Economics is not too complicated when you really look at it. It quite a lot like having good old common sense but a lot of the political elite either don’t get it or they are motivated by something more important to them than intelligence. Simple economics is you have something I need and to get it I give you something you need of equal value. In a Marxist economy I have something you need and you go get the government to take it from me. Sounds like what we are doing now. Anyway.

In a recession you want people to spend money. As I explained in my October 2009 blog every dollar spent in the private (non-government) sector is multiplied by a factor of three over a period of time, whereas if the government taxes a person the value of that dollar taken from them is reduced in to about eighty cents.

If government is trying to stimulate the economy by borrowing money then it makes it harder for the everyday businessman. The pool of money is not a separate pool for the government and a separate pool for the private sector. It is all one big pool. If the government borrows money from the pool then there is less for the private sector to borrow and thus the cost of borrowing goes up in either interest rates or the requirements of borrowing become more difficult. That is part of what we are seeing right now in this recession. Small businesses can’t get the money they need just to be able to maintain their current level of operation.

One writer compared it to taking a bucket out of one end of a pool and pouring in the other end and bragging about how much good work you’ve been doing. The problem when government borrows money there is always an overhead (bucket spillage) cost you don’t have in the private sector. There is always the extra handling, the delays, the restrictions, etc.

Consider also that the average public sector worker is now making an average of $70,000 a year while the average private sector worker is making about $40,000 a year. Every hour a public employee does the same work as a private sector employee it cost America almost twice as much. So even if the government was able to process tax payer’s monies and put it back into the economy at the same rate as the private sector we still lose a certain amount of value of the money. The government does not produce anything or add value to anything; they are simply an expense added to the cost of living in America. Anytime the government gets involved it cost more.

The more government cost us the more they want to raise taxes to cover their cost. They just love to spend and spend and spend other people’s money. Most of us when we have spent more than we should by over borrowing we realize at some point that we must stop spending and start paying back the money we borrowed. Otherwise the people we owe will come and take all those things away that we didn’t have the money to buy anyway. At some point when we’ve used up our credit and we have to start paying cash for everything. Then we must tighten our belts and do without things. Even the necessities may get cut if other things have a higher priority. We, you and me, don’t not have the luxury of raising taxes to cover our extravagant ways.

The government simply says you should pay them more so they can continue to spend all the money they want to on whatever luxury items they desire, just tax and tax and tax. The problem is the more they tax the less value the money has. Remember that the value of a dollar taxed when returned to the economy is eighty cent. The more they tax the less it becomes so the economy decreases and soon we will look like California or even Greece, very bad indeed.

The opposite is true if you cut taxes. I said before that for every dollar spent in the private sector it become about three dollars over a period of time. If the average person was paying taxes at a rate of 10% then for every dollar “added” to the economy it would return 30% in taxes over a short period of time. That means you would collect more in taxes when you give back a dollar to the private sector economy. What would be the fastest and easiest way to “add” dollars to the economy? A great big tax cut. For every dollar the government would cut in taxes it would return two dollars back, a 100% increase in tax revenues. That seems simple enough. That formula has been proven to work every time it has been tried.

In addition if we cut business taxes in half or more then money from outside the country would start flowing into America and add even more dollars to the economy and therefore even more tax revenue to run the necessary government programs and pay off this huge debt. Cutting business taxes would reduce the cost of manufacturing in the US so we could start producing things here again creating more and more manufacturing jobs for Americans. There is already thirteen trillion dollars in American money sitting in other countries because it cost too much (tax wise) to invest those dollars here. That is American money held by American companies and investors. How would an influx of thirteen trillion dollars affect our tax revenues? We could pay off our debt, end deficit spending, run all the programs we "need" (not want) and even return Social Security money back to the people who earned it (with interest). I would love to have that deal. And by the way, get rid of the IRS.

Jobs would increase so everyone who wanted to work could and make more money than ever before. There would be no need for welfare except for the disabled and elderly. That is not the socialist utopia some now want, it is the utopia of the American dream, freedom for life, liberty and the pursuit of happiness.

Cut taxes, spend more private (not borrowed) money, and get more investment money and jobs. Wow what a no brainer, except when it comes to our president(s) and congress. Maybe it has something to do with power and control and not common sense, duh.

If we did cut taxes the only problem would be to get our government to stop spending more than it makes. Just like you and me we have to know our limits. It is up to the people to be the good parent and just say “NO” the next time you go to the polls. Elect people who believe in spending less, taxing less and governing less with fewer restrictions. That is what made America great before and we can do it again.

Nubby

The real results of taxing a business

The recent article "BEHIND NEW YORK'S SMALL-BUSINESS DROP" shows the reality behind taxing business. New York's democratic mayor increased fees and property taxes on nearly everyone and the end results is many business are shutting down. Some are trying to sell out and move. The old adage "whatever you tax you get less of it" still applys. Tax small business, especially in a recession, and they have no way to make up the difference. They can't raise prices because nobody will buy. They can't lay off people because then the work cannot get done. If they do lay off people then the quality of work will suffer. So it is easier to just shut the doors and quit and get in the soup kitchen line like everybody else.

When a business closes then the property value drops, rent space goes vacant. The property owner has less income and the city get less tax money. Property values drop and the city get less money. The business is no longer selling anything so there is less sales tax collected and the city get less money again. An intelligent person would think that if taxing businesses becomes a losing endevor then maybe the city should stop and try something else. If tax increases decreases small businesses then maybe you should try a tax cut and see what happens. Duh!

I stated in a previous post that a tax cut can actually increase government revenues. Maybe its time for New York to do a reality check and quit doing what doesn't work.

Nubby


See the article at:
http://www.ncpa.org/sub/dpd/index.php?Article_ID=18603