Tuesday, July 17, 2012

Considering the Fiscal Cliff: the Laffer Curve, Hauser’s Law, Recession Spending, Additional Spending Through Stimulus and Additional Other Spending

Within the fiscal cliff is the tax component and its associated tax level. The tax component’s tax level is related to levels of tax avoidance which in turn is related to taxable transactions.

Given the tax component and its associated tax level, the economic contraction phase of a business cycle, with known social welfare state programs existing, generally causes additional spending on these programs e.g. increased spending regarding unemployment insurance benefits. The additional spending occurs while simultaneously the economic contraction phase of a business cycle erodes tax revenue. The spend more/less tax revenue is nothing new regarding the economic contraction phase and should be common place and planned for by politicos through the mechanism of government (a known-known). Keep this in mind for a moment.

Hauser’s Law states:

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90).

Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.

Hauser’s Law and the Laffer Curve may well be related, in that, an optimal tax exists [Laffer] that yields the just under 19% [Hauser]? Stated alternatively, if 19% is the average yield from a varying array of taxes and tax rates over the last six decades, then one would assume an “optimal” exists given a varying array of taxes and tax rates that generated (generates) 19%. 

What if the current taxes and tax rates are close to optimal? For a moment let us assume current tax and tax rates are close to optimal. Then the tax revenue currently collected, which is currently/temporarily under the historical average of 19%, is due to reasons other than the tax and tax rate. The major reason pointed to, if the above assumption is considered, is that the number of transactions that are taxable transactions are very low, historically speaking. Hence the culprit may well be the amount of transactions throwing off tax revenue [the very low current velocity of money makes the case] not the tax or associated tax level, all other things remaining equal.

Returning to the economic contraction phase of a business cycle, if one is generally faced with lower revenue and higher social welfare plan costs, what if one adds a Keynesian stimulus plan based on social engineering? Beyond the cost of the stimulus [even with deficit spending there is a “cost“], and beyond this cost being initiated during a period of reduced tax revenue [timing]; how does a Keynesian stimulus plan based on social engineering “jump start” the private sector? That is, the theory behind a Keynesian stimulus plan is that the stimulus is not suppose to solve the economy’s ills, it’s suppose to “jump start” the private sector which then expands causing economic prosperity. This now-expanding economy creates increased transactions and associates tax revenue.

Keynesian deficit spending stimulus plans have never been successful, however they have been unsuccessful to various degrees. If one recalls, Keynesian stimulus theory is based on raising taxes after the supposed jump start causes the economy to expand. That the deficit spending is now repaid through increased tax.

The most successful-unsuccessful Keynesian stimulus plans have been infrastructure related. However, the most recent Keynesian stimulus attempt, which is merely transferring money in hopes of increased demand, also includes transferring money with political constituency building as a clear aim, transferring money based on social engineering and infrastructure as a complete after thought. One sees the most unsuccessful of the unsuccessful Keynesian deficit spending stimulus plans ever deployed and results duly recorded.

Not only are the politicos associated with the recent stimulus plan associated with the most unsuccessful stimulus plan ever recorded, they paid no heed to the known-known of additional spending occurring while simultaneously the economic contraction phase of a business cycle erodes tax revenue. Plus the same group added additional spending too boot. Now we need more revenue? The tax and tax rate is politically framed as the culprit when in fact it’s the folly of certain associated politicos. The folly is deflected as class warfare taxation argument when in fact it’s political folly to the first degree.

In summary, we end this politico spending spree exercise with the exact same politicos framing the spending as necessary, needed and required. Hence the spending needs paid for by the taxpayer as the new level of spending and the cummulative spending is "necessary, needed and required". One is to set aside the abysmal results of spending based on necessary, needed and required. tion was good but the result was poor and hence one is politicdirected to intention not result. And about the increased tax? Using the oldest play in the polictical playbook: class warfare argument, the politico splits the taxpayer into two classes and dupes one class on the concept that they will benefit from the other class being taxed.

Frédéric Bastiat explained such political dupery in the mid 1800's: Government is the great fiction through which everybody endeavors to live at the expense of everybody else.

“Social science has pursued many blind alleys - and ignored many promising ones -- out of the misguided insistence that every model be a ‘story without fools’ even in areas like politics where folly is central” - Bryan Caplan , The Myth of the Rational Voter


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