Monday, July 7, 2014
Washington DC does not approve of simple solutions to problems because Complexity Makes Money for the government.
Simple Economic Solutions Washington, DC Never Wants You to Know About From Social Security to Health Care - Washington, DC Puts It's Own Special Interests First Lex Loeb Contributor Network . Washington, DC represented by both major political parties, knows that there are simple solutions to the complex economic problems we hear about every day. But, Washington prefers not to consider those solutions for fear of cutting into tax revenues and status quo. It is true that the government often seems to pay a dollar for ten cents worth of goods and services, cheating tax payers happily ever after for love of darling insider friends of officials for whom favors are due. That is not the issue covered in this article, sadly, because there is probably no way around it other than having a politically educated public. That probably never will happen. What can happen is to introduce the public to the truth about taxation math. It is very basic math. Government officials do not understand the math themselves because the mathematics involved is not necessarily about cutting taxes to decrease tax revenues. A few people in Washington, DC actually do understand the math but are powerless to explain it to their peers in office and to the skeptical general public. To understand what the problem is one has to know how the tax system really works. Taxation is not a mater of a simple percentage rate charged to corporations and individuals because the economy is much more dynamic and interactive at all levels than a simple zero sum game of accounts to tax without real interactions at all levels of the economy after taxes. If it happens that taxes are not wasted then in the words of President Bill Clinton "government investments could actually add wealth to the economy. Often it is hard to prove that when taxes merely go into a transfer system from one citizen to an other with is what happens with most entitlement earmarked tax dollars. The tax percentage rates due compounds though the economy because it takes consumer demand to generate supply of goods in the market place.. Most corporations and businesses pass their taxes due on to the consumers of goods and services because an ongoing successful business necessarily has cash flow. Cash flow comes from selling goods and services to someone anyone who can afford to buy them. . The assumption that big corporations need to be taxed more simply raises the cost to consumers. Government zeros in on taxing staple items like fuel. Taxing income and capital gains can have the same net effect where everyone in the system attempts to pass on their expenses, including taxes to net reasonable income after paying out all business expenses.. There is no long term viable business in the USA that does not consider taxation a major costs of doing business. Passing taxes on to consumers is really the only way to do it . It is like the question of who is really paying the real estate agents commission the buyer or the seller? Every real estate agent knows that the buyers earnest money and sale closing money are the funds their commission will come out of. Real estate agents don't often take a share of ownership of the home they are selling to get their commission payment. It will definitely take cash from the buyer to pay everyone in the transaction. The Buyer's money often comes from the mortgage provided by a bank. The entire liquidity of the sales process in real estate then requires a buyer with money. Government does not often take goods or services to pay taxes but wants cold hard cash . Suppliers in the economy only get cold hard cash by selling to consumers so no mater what else happens the consumer is paying the tax even if a corporation or individual is just holding the money in the transaction to pay their own taxes. Individuals and corporations in business then necessarily charge enough on every transaction to retain a sufficient profit margin after their own taxes will be due to the IRS. If you ever wondered why goods and services cost more in Tokyo than in Common town, USA you should consider that real estate rental prices are necessarily higher in Tokyo than in most American cities. Businesses in Tokyo need to charge their rent to their customers in order to survive , pay the rent and retain a reasonable profit margin after sales , production and tax expenses. It is possible that merchants in Tokyo get stuck with lower margins on sales even when they do raise the price accordingly. A farmer producing and selling golden eggs lay-ed by special geese that lay golden eggs is the guy government is looking to tax. Government more efficiently can collect taxes than to try to being the golden egg business. As much as politicians want to make an issue out of golden egg envy to stay elected they know that having the power to tax the farmer leaves government officials absolutely no need for envy. The farmer puts his $2000 eggs on the market and they sell. The goose is never taxed or it has less to eat to produce more eggs. Consumers thus necessarily find them selves coving the farmer's cost of the taxes he will pay even if he has competition from many other golden goose egg producers. He can sell less and the government nets less tax revenue. He can sell more and the government gets more but the consumers have to put up the money. If the layers are really magical than they never need to be fed. There are no costs other than administrative costs, distribution costs and the taxes. Golden goose eggs won't roll into super markets all by themselves. If government took the geese there might not be any golden eggs in super markets because government would be slicing thin them up to make dollars out of. When the super market buys whole sale golden eggs from the farmer they pay his income tax and when they sell the golden eggs to the consumers that come into their stores, the consumers pay the super market's income taxes. If there is more than one distributor between the egg producer and the super market than more layers of taxation are added. The added layers of taxation compound the cost of the eggs to consumers as everyone passes on their taxes due in the great chain of destitution. The chain of distribution is even longer when car manufacturers buy component parts from many suppliers who buy basic materials to fashion those parts who in tern pay even more basic materials suppliers and transpiration companies to get them those materials. Here is the math you need to know to figure out why a new automobile in a factory showroom costs you, the consumer , far more than its intrinsic costs of manufacturing and trans portion to the show room . Lets say the government has a fixed ten percent tax on income of all companies and individuals supplying the parts to an automobile manufacture who builds and ships the car to the final dealership. The compounding of taxes works like this: Say the tax rate is a flat 10 percent tax on sales to each entity in the manufacturing and distribution of the car you will buy. The first supplier will attempt to charge 1.10 percent and so do the subsequent levels in the manufacturing chain of being. At a ten percent income tax compounds though the supply chain such at ten percent and at 25 percent in the table below: consumption level @ 10% tax rate @25% tax rate first level 110 % 125 % second level 121 % 156 % third level 133% 195 % forth level 146 % 244% fifth level 161 % 305 % You may not realize it but the last time you went to buy a Ford or a GM car you paid a lot more in taxes for the final product than you ever realized. Corporate taxes average 40% on income and not on sales so the real figure is some what higher than on this chart. It is also true that corporations can find ways to reduct tax liabilities and that becomes a benefit to consumers down the line in slower compounding. If the effective tax rate is 25 % your $45,000 new car actually includes around $30,000 in taxes you had to everyone at every level making all the stuff that goes into the assembly lines, transport and to your car dealer to pay everyone's income tax. The real intrinsic cost of the same car would have been around $15000 otherwise. Lower taxes in countries that make foreign cars , lack of income taxes and capital gains taxes there can make a foreign car more competitive in price in spite of ocean liner shipping costs added and even some tariffs imposed by customs. Because of constant compounding of tax rates at all levels of the economy the economy itself becomes taxed with demand moderated with fewer people buying high price cars. fewer car sales than mean lower tax revenues OT the government. which is why having higher tax rates can be counter productive to the government's own interests. Lower over all tax rates at all levels of production and distribution of products can actually increase revenues to the taxing authority. This is what has been called supply side economics. Few in Washington DC actually understand it. Occasionally , however tax rates do get cut and we do see government net more money than had they kept the higher rates because there is more economic activity when costs of doing business are kept low. The idea is entirely counter intuitive to most Washington DC economists and power brokers. George Bush Senior called it voodoo economics when Reagan experimented with supply side economics. The lower taxes rates did not stop government from realizing more revenues or from growing to a larger over all size than when Reagan first took office. States tended to raise taxes when the federal government lowered them which was even more counter productive to the overall economy. The Reagan tax cuts were a success in spite of a lot of continued disinformation on the subject form policy wonks in Washington DC who dream of the good old day of 70 to 90 percent income taxes again. The big secret is that economies can all thrive and grow at double digit rates of compound growth if consumers can afford to purchase more production and not less. There is no reason that a developed economy like the USA or Europe cannot grow at a double digit rate the way China and some other developing countries have in recent years. One sure way to get higher long term rates of growth is to cut taxes in a major way and not to allow taxes to compound at every level in the production side of the economy. Each successive year the overall economy grows at a higher rate of return , government gets a smaller share of taxes but as the pie grows in diameter their slice can actually be bigger. It becomes a balancing act. Congress came up with the phrase "revenue neutral" which means that they want to keep the same cash flow whether taxes go up or down. That starts to become absurd when government is worried about paying for nationalized universal health care. The best way to reform the spiraling cost of health care mess is actually to cut taxes on medical goods and services to near zero and treat the health industry as a sort of necessity. All government should be doing is setting tax free basic rates for goods and services and above and beyond those basic suggested rates and fees have higher rates of tax applied. As it is the government is using the heath care system and even non profit hospitals which are loaded with individuals paying income tax as a super cash cow. Universal heath care is a joke if the intention of government is to tax it and have services become affordable. The best way to lower costs is to drastically cut taxes on services that meet government guide lines for quality and affability and to allow much more free competition in providing medical goods and services, Washington can't figure it out. They want their taxes from what you need as a necessity . The result is the compounding rates seen in the table above where an aspirin in a hospital can cost 3 times what the hospital pays for it because everyone along the line of its manufacture, transpiration and distribution is taxed at a high tax rate. Beware of government promises of goodies you get for higher tax rates. Beware of politicians saying taxes need to go up for anyone, rich or poor in society. The reason the rich stay rich even in many socialist countries is because they just collect government taxes for the government as they pass their taxes on directly to the consumers most of whom get fooled into voting for class welfare instead of protecting their own real economic interests. .c