Creative Destruction

March 30, 2006

Economic Noodling

Filed under: Economics,Politics — Robert @ 7:18 am

Assumption: the value of each nation’s capital stock is directly decreased by a marginal increase in taxation above any arbitrary point. The reason is that the competitive market for international capital, which is huge, trades on one commodity more than any other: overall taxation rates / size of government in the various countries. Ireland lowered its taxes moderately and its national income has skyrocketed past the Continent in a generation’s time.

(I believe the value of a nation’s capital may also decrease owing to economically repressive activities each nation takes within its own borders, and that this point is non-controversial, but it’s not my main point here.)

The national tax structure and government “bite” can be used as a throttle on the growth of equity valuation. “Maximum speed” is zero percent. Every increment thereafter reduces capital formation, and thus total social wealth.

Therefore: Every proposed increase in any form of taxation is therefore a tacit (if unintended) proposal to reduce the overall prosperity of the human race.

There are certainly reasons to justify increasing the total taxation above zero. Taxes pay for government, which in turn provides real services. Keeping the barbarians from overrunning the marketplaces is worth something. Having a decent postal system not run by the mafia is worth something. Law and order is worth something. Feeding the needy – to the extent that the citizenry desires to further this worthy end – is worth something. And there are certainly worthy general government activities that make it a lot easier to do business (there’s that equity value again) – research support, patent offices, standards bureaus, etc.).

Other causes take on less urgency when viewed in this light. Everyone probably has their own list; that’s what democracy is for, to thrash out the lists and see what we decide to do or not do as a group.

I must dive back into the unending pile of work, but feel free to chew this one up as you wish.


1 Comment »

  1. Bob, your views on this topic closely mirror my own. Moreover, I see an intuitive fairness in paying taxes in direct proportion to earned income — if you earn twice as much money, you should pay twice as much in taxes — in other words, a flat tax.

    Of course it only works without the huge number of deductions, exemptions, tax breaks and credits that we have now. As Milton Friedman has pointed out, our current tax code is neither progressive nor regressive, but simply random, as more and more special interests have successfully lobbied for their own dedicated tax break.

    I am, however, sympathetic to the argument that lower income families have to spend a much higher percentage of their income on necessities (e.g., food, clothing, shelter, etc.) and that a truly flat tax would place a disproportionate burden on their significantly reduced disposable income.

    For that reason, I would support a modified flat tax that allowed for a single, generous exemption (say $40,000 or so for a family of four.) Only income above this amount would be taxed, and would be taxed at a fixed, flat rate.

    That means that the effective tax rate would rise with income (i.e., it would add an element of progressivity to the structure.) The effective rate would asymptotically approach the nominal rate, but would never actually reach it, this doing away with the confiscatory rates we saw pre-Reagan. That’s the only kind of progressivity that makes any sense to me, honestly.

    Comment by bazzer — March 30, 2006 @ 3:30 pm | Reply

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