Thursday, December 27, 2012

Best of Biblical Conservatism - Reality Check: Liberal Tax Policy Has Not and Will Not Succeed

This week, I'll be away on my annual Christmas Vacation. So today and Thursday, our new publishing days, I'll be posting Best of Biblical Conservatism articles that I feel are pertinent to our current moment in time. Merry Christmas!

Liberals have been stepping it up recently their cries to fix our deficit problems in states and on the federal level with the same solution this bunch has been promoting for years, "tax the rich."  Between cries at protests and dear old Michael Moore stating that the money owned by the wealthy is a "natural resource," (1) we've been bombarded by the same pie-in-the-sky easy solutions which require no sacrifice from those who cry for it.  Just tax someone else more, because "they can afford it", then all our troubles will be solved.

I've gone into great detail on the immorality of simply soaking those in our society who produce and succeed for more tax revenue (2) as well as the fiscal failures of those policies and the fiscal successes of reduced tax rates as it pertains to both the economy and to actual net tax revenue (3).  For now, however, I'm going to set these issues aside as I continue to present a preponderance of evidence against these policies over time to instead point a logical fallacy which continues amongst liberals. Buckle up, friends, because we're about to take a trip to a place I like to call The Real World!

Warning:  Entrance into The Real World requires you to consider consequences of all actions.  In The Real World, every action has a consequence. We cannot, and will not, pretend that by instituting a particular fiscal policy, nothing will happen save for the targeted goals of the policy.  You've been warned.

Let's pretend that you are a business owner.  You own the Acme Widget factory, a company that provides fine quality widgets, cogs and sprockets to 10% of all businesses in your state.  Your business employs 500 individuals with an average salary of $45,000 per year (4), giving you a payroll $22.5 Million annually.  That means your company's employees pay the federal government approximately $5.625 Million each year in taxes (5).  Let's also pretend that your state has a 10% state income tax, meaning that your employees pay that state $2.25 Million in taxes to that state.  This company's gross revenue is $40 Million each year (6). The company's building costs, operating costs, benefits costs, complying with federal regulations, etc comes to $12.5 Million. The company is making a reasonable net profit (7) on the widgets, cogs and sprockets of $5 Million each year, a 12.5% profit, while employing 500 people and paying those people a salary which pays $11.25 Million each year in aggregate tax revenue to the Federal and State government toward the things the government is currently funding (8). 

Let us now pretend that the state government decides to place a 10% tax on the corporate value of all businesses within that state in an effort to close a state budget deficit.  The Acme Widget Company is now assessed a $4 Million annual tax as a result.   As the owner, you conclude that your company needs to continue making a 12.5% profit for it to be worth having a business. After all, you didn't open this company just to give people jobs and benefits.  You took a risk that you could create widgets, cogs and sprockets for more money that it costs to produce. Each year you put up $40 Million and end up with $45 at the end of the year. But now your PROFITS are being cut not 10% but 80% as a result of this tax, because taxes are based not on profit but on the total worth of the company.

You now have some options.  In order to maintain profitability, you can lay off some workers.  Laying off 100 employees will close the gap. If you do that, however, you are now removing THEIR tax revenue from the state and federal government because they are no longer receiving a paycheck.  Thus the loss to state government is $1,000,000 in tax revenue, meaning government's net gain in funding ISN'T $4 Million, it's now $3.6 Million due to the lack of tax revenue from your now unemployed workers.

You are also now making 20% less widgets, cogs and sprockets for the businesses who use them, but that's okay because those companies have also had to lay off workers to help keep THEIR company profitable due to this new tax, which leads to the unemployment of 10% of their employees and the loss of THEIR tax revenue.One of your clients, for example, the Johnson Air Conditioner Company, is now producing 10% fewer air conditioners and are now having to charge more per air conditioner to maintain THEIR profitability, causing the cost of a unit to go up.  This in turn causes sales of air conditioners to drop 10% because people at a certain level decide to go without. This leads to Sears employing less air conditioner salesmen, and the subsequent loss of THEIR tax revenue.  Oh, and don't forget, since your company now has 20% fewer workers, you're company is now producing 20% less and bringing in 20% less profits which reduces your company's total gross income which reduces the total tax receipts the state is receiving from you, because the tax is a percentage.  If the gross revenue of your company drops, so does the amount you are paying in taxes.

All of a sudden, there is less money coming into the government than before.  They intended to close a deficit, but instead ended up eliminating taxpayers and causing less revenue to come in.  To deal with their mounting deficits, they decide to raise taxes on corporations again and the process begins anew.

See, here in the Real World, we don't pretend that all economic decisions have static consequences.  We recognize that the person who is taxed will do something to compensate instead of just taking the loss.  And, of course, there is one other thing this business can decide to do. They can decide to move their company all together!  Perhaps they decide to move their company to a state like Florida where there is no corporate tax and no state income tax! So now your state isn't just losing 20% of the employees' tax revenue they receive but now they are losing 100% of revenue, $2.25 Million each year, in tax revenue from that company.

Or maybe, as the owner of the Acme Widget Company, you decide that the taxes on both the state and federal level are ridiculous, so you decide to pull the company out of America entirely and set up shop in Mexico.  You are free to do that, government cannot stop you from it. Now, between the federal and state governments, there is a loss of $12.25 Million in tax revenue because every single employee of your company is no longer paying taxes because they don't have a job at the Acme Widget Company.  Further, because Acme is no longer there to supply your widget, cog and sprocket needs, Johnson Air Conditioner has to find a new supplier which costs them 20% more in parts.  In order to maintain their profit margins, Johnson has to lay off some employees, produce less air conditioners, raise their prices, and the cycle begins again.

You see, the problem with Liberal Economic policy is that it is based upon unrealistic expectations of the reactions of the business owners.  The people who instituted this 10% corporate tax expected to simply receive $4 Million in additional tax revenue but instead caused a chain reaction which removed part or all of the tax revenue this company was creating through it's employees taxes.  The owners of this business are free people.  They are not serfs of the land required to remain in the state that they are currently located or the nation they are currently located. The numbers in my example may be arbitrary but the reactions of the business are not.  This is what has happened and what does happen when business taxes are increased.

Those of us who live in the Real World don't have the luxury of pretending that these businesses will simply decide to eat the loss, make less profit and continue to provide the same products in the same quantities and continue to employ the same number of people.  It's not really going to happen, and there's no way government can force them to do it.

Friends, the above example explains why Capitalism is the only financial system that works while still protecting the fundamental rights and freedom of individuals.  Socialism and Communism require either people to act contrary to their nature and be 100% selfless without any consideration to consequences to themselves, or employing a command government which takes away rights.  For Communism to NOT take away any person's rights, individuals have to willing take less in an effort for the greater good.  This is inherently contrary to human nature. 

People under most circumstances do not intentionally harm themselves in order to help others.  There are certain, very noble exceptions like military service.  To those of you who have served our country in this capacity, thank you for keeping us free.  I appreciate you more than you could know.  Yet we must note that that sacrifice is in order to protect those other individuals rights to life, liberty and the pursuit of happiness.  The vast majority of people do not intentionally harm themselves to ensure that government can continue spending and spending and spending.  If they would, we wouldn't have deficits in government, and these Liberal economic policies would've worked previously when they have been tried.  They haven't.  Also, no amount of harping and scolding by Liberals has lead to these employers and producers to wanting to do themselves financial harm.  Once again, since you can't force them to, we are at an impasse.

Furthermore, for these policies to be successful, one must also expect Government to behave responsibly.  History has shown that an unchecked, irresponsible government that gets used to spending 50% more than they take in in revenue will continue to spend proportionally as they see an increase in revenue.  I have given the example before of the Reagan years.  Under Reagan, net tax receipts (that's the total amount money in dollars and cents received in taxes by the Federal Government for those of you from Palm Beach County, FL) doubled. Deficits, however, expanded.  Since revenue doubled, plain old fashioned logic tells us that the problem wasn't insufficient revenue...we had twice what we had before!  Had government simply MAINTAINED it's spending levels, we would have had a balanced budget.  Yet government did not spend less.  They spent $1.80 for every $1 that was brought in...the exact same proportional spending they had spent before the increased revenue.

At that time, government was used to spending 180% of tax revenue.  Today, government is spending about 200% of what it takes in, requiring us to borrow the same amount that we take in in taxes.  The problem is government is used to spending twice what they bring in as tax revenue.  History has shown us that government, left unchecked, will not spend less with more money.  They will simply increase spending on par with the increases and the problem continues.  In fact, it becomes proportionally larger!

However, there is another side to this concept. What if Government decides to CUT taxes on these businesses. Let's say we keep the same basic numbers. Again, you own the Acme Widget factory, a company that provides fine quality widgets, cogs and sprockets to 10% of all businesses in your state. Your business employs 400 individuals with an average salary of $45,000 per year, giving you a payroll $18 Million annually. Your company's annual worth is now $39 Million.  Your company is paying a 10% corporate tax to the state at $3.9 Million.  You're making the same 12.5% profit on your investment, a net profit of $3.75 Million.  Suddenly a Conservative state legislature and a Conservative Governor take office.  They want to create a good climate for business in your state.  They permanently repeal that 10% corporate tax. 

Since you are a good businessman, you realize that your business now has $3.9 million in new capital for the next year.  You could pocket that $3.9 Million and spend it on whatever you like, at which point everything you buy is going into the economy because someone has to make the product you buy or provide the service you buy.  You could stick that money in the bank where your bank uses that money to give loans to other people to buy a home or a car or to start their own business.  You could invest it in other companies via the stock market.  Under any circumstances, that money is working in the economy.  But perhaps instead you decide that you could invest that money into your own business. So you invest that money right into your business. 

For starters, you hire 85 people in order to produce more widgets, cogs and sprockets.  Because you have more people on the job you can make more widgets, cogs and sprockets every day.  So you figure you can now sell those widgets, cogs and sprockets for less a piece so you can undercut your competition and gain market share.So now your price is lower than the widgets, cogs and sprockets company down the street.  More businesses buy their widgets, cogs and sprockets from you because of your great prices. Business rises another 10%, so now you have 10% more revenue ($4 Million more).  Since the last reinvestment into your business was so successful, you decide to invest that money into the company as well.  You hire 85 more people at $45,000 per year which causes you to produce more, sell each widget, cog and sprocket at less, allowing you to lower your prices.

All of a sudden, more people are working.  At this stage you've hired a total of 170 new people at $45,000 per year.  Each of those new hires who you are now paying $45,000 per year are paying 10% in state income tax for a total of $7.65 Million in new tax revenue.  That's more than you were paying in corporate tax...nearly twice!  Let's not forget that these employees, who were previously unemployed, now have more disposable income.  They're more likely to go out to eat, to buy a new car, to go on vacation.  Someone has to make and serve that dinner, someone has to make that car and sell that car and service that car, someone has to book that vacation, someone has to fly the plane to the vacation, someone is a flight attendant, someone has to work the desk at the hotel.

I'm not making this stuff up.  This is what historically happens when the producers in the world have new capital available to put into their business.  The majority of large business owners with successful businesses see their business as a sound investment. If their business is steadily turning a 12.5% profit, they believe that they can, over time, increase whatever new money they now have by 12.5% over time.  And remember, even if they do keep that money for themselves it still goes to work in the economy.  The only place where money doesn't go to work for the health of the economy is in the hands of government, because government spends without producing anything.

Once you look at economic policies based upon the results and the reasonably expected consequences of those actions, it becomes crystal clear what the best plans.  The good intentions of liberal polices cannot be logically expected to come to fruition.  It's just not reasonable to expect.  Economic policy consequences don't happen in Ideal World, where Liberals think up these policies.  Economic policy consequences occur in The Real World. 

So let me ask you something:  In the Real World (where you do in fact reside), what set of economic policies are going to yield a robust, growing economy with low unemployment?  Good.  Now if you want a healthy, robust economy, I think we both know what way you should be voting.  Vote for good results, not for good intentions.  Because compassion of result is what really matters, not compassion of intent!  

(1) Michael Moore Thinks Wealthy People's Money Is A 'Natural Resource' And Should Be Shared

(2) It's Not the Government's Money: Why how much money a person has DOES NOT MATTER
     by Christopher C. Bastedo

(3) Conservatives are the Center by Christopher C. Bastedo

(4) Average Salary.  Some make less, some more.

(5) Based upon an average Federal tax rate of 15% on the average salary of $45,000 per year

(6) Gross Revenue = All Revenue Brought in Over One Year

(7) Net Profit = Gross Revenue - All Business Expenses

(8) Figure obtained by calculating 15% of payroll to Federal Tax and 10% of payroll to State Tax 

No comments:

Post a Comment

All posts will be reviewed subject to the Rules for Commenting. Any post that does not abide by these rules will not be posted, entirely at the discretion of the blog editor.

Commenters who repeatedly violate these rules will be permanently banned from commenting, and thus none of their comments, regardless of content, will be posted.