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.
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“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
Gordon Tullock and James M. Buchanan wrote The Calculus of Consent, Logical Foundations of Constitutional Democracy which is the book that, in the main, launched Public Choice Theory.
In another book by Tullock, Government Failure, he makes an interesting point that up until Hobbs and Machiavelli (circa 1500) the concept of "self-interest" did not exist in any formal way, that all social and private issues were discussed on moral and ethical grounds with self-interest not a player or formal concept.
“Until the days of Adam Smith (1723-90) most social discussion was essentially moral. Individuals - whether they were businessmen, civil servants, politicians, or hereditary monarchs - were told what was the morally correct thing to do and urged to do it.” (1)
With David Hume and Adam Smith in the 1700’s the concept of self-interest became mainstream but only in private endeavors whereas "government" issues were still discussed on moral and ethical grounds with self-interest not a player. That is to say, government and the politicos that make up government, the issues thereof, continued in the realm of moral/ethical until the late 1940's and mid 1950's when political science was doing a poor job of explaining the inner workings and resulting output of "democracy" which prompted the application of economics to the study of political science and the advent of Public Choice Theory - which clearly shows politicos do function in their own self-interest.
Tullock points out that politicos today still try to dupe the public per talking points such as public servant, working in the public interest and doing the people’s work as they desperately try to convince James and Jane Goodfellow that they, as politicos, are not at all self-interest oriented and are merely working in James and Jane Goodfellows best interests. That is, politicos continue to sell the 16th century in the 21st century.
Which then reminds one of Milton Friedman's famous quote which summed it all up very nicely: "Is it really true that political self-interest is somehow nobler than economic self-interest?"
Notes:
(1) Government Failure, Tullock, Seldon and Brady, 2002, CATO Institute, pages 3 - 4.
Defining the popular term austerity: the managing response to the known long-term cascading unintended consequences of politico policy.
It’s a known-known that first stage economic consequences, the short term effects thereof, match politico time horizons i.e. the next election. Second, third, and so on economic consequences of politico policy yield long-term cascading unintended consequences, much of which are unfunded politico promises, ending in a reversal of the “promise”. The action phase of reversing the unfunded promises being “austerity“.
Assume for a moment that the anti-austerity mantra within Greece is basically the public's reaction to politicos having put them [the public at large] in the current situation. That is, the public was duped.
Further, a new set of politicos can easily draw upon the mantra that the public was duped and that somehow, and in some way, the public should not have to pay for such dupery.
OK. Someone else is at fault, responsibility is transferred, and someone else should have to pay the price.
However, the dupery of politico policy yielding positive first stage economic consequences are in fact benefits accruing to certain individuals and groups. That the politico, benefited individuals and benefiting groups believe the dupery is transferred to a third party [taxpayer]. Stated alternatively, the benefiting individuals and groups participate in the dupery in that they happily welcome the benefits and think someone else will pay the price of dupery.
Going back to the Greek public’s reaction to austerity, let us examine a counter factual. Assume for a moment that Greece was still on the upward slope of an accumulating debt spiral. That the accumulating debt spiral was still funding an extremely liberal early retirement, fat public sector pensions, bloated government with fat pay, government owned enterprises producing non-competitive items with workers garnering fat pay, etc., etc. Would we hear calls of dupery?
The benefiting groups were not duped. The debt spiral and the false benefits thrown off by the spiral became a "participation sport". Any dupery is that the benefiting groups thought they had transferred dupery, when in fact, all parties were duped for the exception of the politico.
What is the "both sides of the table" phenomena regarding collective bargaining in conjunction with a government monopoly? The public choice theory proposition of the both sides of the table phenomena is basically:
(1) if bureaucrat X is negotiating with collective bargaining public sector union Y, exactly what motivation does bureaucrat X have regarding negotiations? The problem goes back to Milton Friedman's fourth category of spending: other people (bureaucrat X), spending other people's money (taxpayer money), on other people (recipient class which in this case is a public sector union). Therefore the bureaucrat has little motivation because he/she is spending other people's money not his/her own money,
(2) public sector unions have found that they can collect dues through members and funnel dues into political action funds. They then fund the campaigns of politicos that promise them [public sector unions] more compensation/benefits. They not only fund certain politicos but actively encourage their union members to campaign for the politico. Once they get their particular candidate elected they have now secured a politico who over sees bureaucrat X.
Political dupery in action
The public choice theory proposition of both sides of the table phenomena many times is discussed in terms of collective bargaining by unions and resulting rich benefits bestowed upon the union and its members. However, rather than pointing to the richness of the benefits and the inability of the taxpayer to pay such benefits, what if one focuses on the political dupery of the benefits.
The both sides of the table phenomena, long the norm for public sector unions, is no longer in play in many locals as tax revenue streams have been reduced, the taxpayer can‘t afford more taxes to pay the benefits, and taxpayers have elected politicos that have changed those sitting on one side of the table. Hence the politicos bestowing benefits via taxpayer dollars and/or deficit spending to build dependent political constituency has, for the time being, ended. The accumulation of benefits via the both-sides-of-the-table phenomena is then defended by the now unrepresented yet purposely built dependent political constituency. Hence they can’t rely on the other side of the table and begin a second line of political maneuver which is strike, slow down, picket, etc.
A much overlooked item is the accumulation of benefits bestowed were in fact bestowed based on the short term political time horizons (next election) by a series of politicos (many of which are now long gone). The actual ability to pay the basket of benefits/wages, unfortunately, was never the aim of the politico. That is, its not the accumulation of “unrealistic promises” its really the purposeful accumulation of unrealistic promises [its not an error or oversight, its purposeful].
The result is the union and/or union employee think/perceive they “negotiated” items, when in fact, there never was any true arms-length negotiation. There was never any intent to negotiate long term funded realistic benefits and wages. Rather, the union or union representative, the supposed accumulated “negotiated” benefits/wages thereof, are in reality an accumulation of purposeful politico promises matching politicos short term political time horizon devoid of long term funded realistic benefits and wages.
One might consider this proposition: the both sides of the table phenomena, where the union or union member thought they where negotiating benefits, was a benefit mirage. Stated alternatively, the purposeful political dupery of the politico toward the taxpayer in the both sides of the table phenomena was simultaneously the purposeful political dupery of the union side of the table as the politico actually, in the long run, duped both the taxpayer and the union.
To make this concept even clearer, the both sides of the table phenomena is portrayed as duping the taxpayer. True. But the both sides of the table phenomena is duping the union and union worker as well. The politico is duping everyone in the room as well as outside the room.
The end result is a union that thinks they have played a role along with politicos to dupe the highly defused taxpayer when in fact they themselves were duped. The basket of benefits is a basket of promises not a basket of negotiated benefits that are funded and realistic. Therefore, the union strikes, performs walkouts, performs work slow downs and pickets based on dupery. That is, they have yet to figure out that benefits promised are much different than benefits negotiated and funded under a limited tax revenue stream. Stated alternatively, their very strike is occurring as they have yet to figure out they have indeed been duped too.
