Monday, January 19, 2009

Why having higher taxes is actually good

Taxes are both a helpful thing for a country and a bane to its people. None of us want to pay a large amount in taxes, but we all want to use the benefits that come from it. We all want to drive on roads. All of us want our children to be educated in good schools. And all of us want to be able to count on the fire department of the police to show up at our doors when we need them. We Americans love our social services, but we hate paying for them. Why is this? Furthermore, why is there this believe that it is actually a good thing to cut the taxes?

Let's start by simply looking at what taxes do. Simply put, they keep our government running. From the water, to the roads, to the salt trucks, taxes keep everything running smoothly and great. Sure, there might be some corruption every now and then, but generally, at least in America, we are getting exactly what we paid for. Taxes are the only reason that we have a functioning government, and they are one of the things that keeps our country strong. Without taxes, we would be a land dominated by monopolies, which, while they can be good, are usually bad to the average person.

No person can argue that taxes are a bad thing; the thing that we argue about is how much is too much. Sure, it is one thing to create a Communist nation, with each giving as they can. That is bullshit, and will not work in real life. On the other end, however, is the perfect capitalism, with dog-eat-dog. Again, that is bullshit, and will quickly result in a Hobbsian anarchy. The middle ground is the taxes, and that is where the argument is. Should we pay for a lot (health care, education, libraries, etc.) or just the needed (government, military, function)? This is where everything falls apart.

Well, I want to make this a very simple argument. If we can show that it is better for the economy (which, we can assume means that it is better for the country) to tax higher or lower, then we can show that that means that it is better to tax or not. We can ignore all other arguments, as they, simply, are of opinion and are not falsifiable.


So, is it better to tax or not to tax?

Now, basic logic would seem to dictate that the less money that you take out of a system (tax) then the more money is in the system to be spent and moved around. Basically, the lower the taxes, the higher the GDP. However, looking at this graph, you notice that the stereotypical lower taxes times (Reagan, Bush, Bush) are actually on average far lower in GDP change then during the high tax times (Carer, Clinton, JFK). Are these graphs wrong, or is common sense wrong?


Here, it seems, common sense is wrong.


Instead, think of it like this. Where does the tax money go, and what is it being taken from?

What is it from - Tax money is taken from profits, either a persons or a companies. When my company makes 100,000$ in profit, they tax it. If I go even, or lose money, it is not taxed. Same with people. Basically, the needs are already in the economy, so we can ignore them.

Where does it go - Tax money goes right back into the economy, guaranteeing an input of the profit made, even if the person wasn't going to spend it already. This guarantees that the economy will get more income then just straight up no taxing.

When you think about it like that, one quickly notices that the economy is actually better off with taxes, provided they are reasonable. As long as taxes allow the needed items, and leaves some for extra (growth), then the economy is much, much better under taxes.


Unless the two Bushes are major outliers, we will see in the next 4-8 years, that a higher taxing, larger spending, and big budgeted country has a higher GDP.


But does this work for Ohio?

Can one really assume that this same pattern will work for Ohio? Well, I suppose that if it works nationally, it should work within each and every location. Sure, various variables have been changed, but the overall concept is the same. However, the problem with Ohio is that it is a much smaller scale, which means that we would not have the same income level as the national scene. This, though, shouldn't make a problem in this equation.

The problem here, however, is the fact that the economies in one state are not tied only to that state. Not only does the national government effect it, but the actions out of state (say by Ford in MI) greatly effect it as well. Unless Ohio were to become isolated, I do not believe that we can use this model to show that taxes help or harm this state.

If you have graphs of Ohio's Tax rates and GDP, please send them to me (get my info in the contacts section). I would love to be able to talk about this sometime.

35 comments:

gil said...

hi friend!! U have a very cool site here....would U mind if we exchange links? ^_^

Whalertly said...

I am sorry gil, but as I have no bloglinks at this time, I would have to say no

Jeff Lehner said...

Hard to see how tax hikes could do any good right now. Our problem is a lack of investment, new taxes would make this problem worse.

Barga said...

Which is why it is hard to understand the correlation between the hikes and a better economy. Think of taxes as an investment, it goes into the gov't and comes out into the economy

Jeff Lehner said...

Not sure I follow, Barga. Are you saying tax hikes will help growth or hurt?

Barga said...

I am saying that tax hikes will help promote the growth of the GDP and the countries economy

Jeff Lehner said...

C + G + I + E = GDP

C is flat

G can only be boosted at the expense of I

E is negative.

I does not come at the expense of G, in fact, expanding I leads to greater G (Laffer Curve).

Tax hikes will hinder I to boost G; not the best way to go, in my view...

Barga said...

can you please use non-variables for me... i got lost

Jeff Lehner said...

C is consumption, G is government spending, I is private investment, E is net exports.

Jeff Lehner said...

Plus, it's also the case that increasing government's role in the economy gives idiots like Rod Blagojevich and Ted Stevens more influence.

Perhaps a better case against big government than any other...

Barga said...

the question becomes, are people investing. By paying taxes we are forcing an investment, as msot of the money comes back into the economy

Jeff Lehner said...

Thats the point though. You're right, the objective is to spur investment. So how do we do it? Via tax hikes at the cost of hindering private enterprise or via tax cuts to incentivize private investment?

Government doesn't create wealth, it spreads it around. If the point is to produce more wealth, tax hikes are the wrong way to go.

Good discussion. Good site you've got here.

Jeff Lehner said...

Barga:

I invite you to come on over to my site. New to the Carnival of OH Politics scene and not getting a ton of comments yet..

Barga said...

"Thats the point though. You're right, the objective is to spur investment. So how do we do it? Via tax hikes at the cost of hindering private enterprise or via tax cuts to incentivize private investment?"

--It all depends on how the government does it. Tax breaks on companies outsourcing is counter productive, if they are coming into the country then give them the break (pay it with our money) as they will help by far into the economy. I government is a bad investor is the only issue--


"Government doesn't create wealth, it spreads it around. If the point is to produce more wealth, tax hikes are the wrong way to go."

--If you look at the graph it is the opposite--


"Good discussion. Good site you've got here."

--Thanks, adding another author and trying to get anothher one going... hopefully we will get better and bigger--


Off to explore your site. I am far more into politics then the economy, thought

Jeff Lehner said...

Interesting read:

Robert Barro on stimulus in today's Wall Street Journal.

Jeff Lehner said...

correction: yesterdays wsj though i guess it doesnt matter

Ander said...
This comment has been removed by the author.
Ander said...

we can talk about taxes and spending and who the best at deciding how to invest that money for it's best use all day. It really doesn't matter though because it doesn't matter who is investing or saving where so long as money continues to be created through debt. We will never have sustainable growth so long as we have a credit system. Compound interest is a leech on production.

Barga said...

Jeff
the source seems to be going along with what I said, that government is quite stupid when investing money compared to what should happen

was i just reading it wrong?

Barga said...

Credit is needed and has always been. The issue is our interest level

Ander said...

Credit has always existed but its influence has never been this large. It is not needed. Our interest rate is not the problem. Our problem is the way money is created and who controls its creation. If you are referring to our current problem of being interest rate, that is also incorrect. Our current problem is a problem of solvency, not liquidity. We can print money to high heavy and spend it all we want but it means nothing if debt and the interest to pay for that money is also created. Also by creating more money we are devaluing the money that is currently in circulation.

Ander said...

Our current interest rate is only a problem because it has placed us in a liquidity trap.

Barga said...

Money is irrelevant in this discussion as we are assuming that some medium is needed. Credit, hwoever, exists in every medium from the day one person said 'put it on my tab'

Ander said...

Money is credit.

Ander said...

Every dollar is a physical representation of debt. Money is only created through credit in our financial system. When the government wants $10 billion, the federal reserve prints $10 billion and buys $10 billion in bonds from the government at whatever the treasure bond interest rate is, lets say 3%. The catch is the $3 million is never created to pay that interest. Debts at the highest level cannot be paid because there is never enough money. Not to mention the private corporation, the Federal Reserve, profits massively from this off of interest.

Corporations were originally charted by the US government to perform a public function. We charted a contract with the federal reserve to hand over that function to a private, profit driven entity, with the financial interests of its shareholders, placed legally over everything else. Those shareholders are the nations largest banks.

Ander said...

If there were no debts. There would be no money.

Jeff Lehner said...

The point of the article is that Barro is skeptical that the benefits of huge new govt spending programs ("G") will outweigh their cost to "I" (to go back to an earlier post, C + + G + I + E = GDP)

"Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant."

= We should cut taxes to incentivize new investment.

Ander said...

and I am saying you can cut all the taxes you want and invest all over the place but we will never have sustained growth so long as we have a debt based monetary system. we will always live with debt bubbles, collapses, recessions, and a huge transfer of wealth from the poor to the rich so long as we keep credit money.

Barga said...

ander
how do you propose that we fix this

Barga said...

but that is the point of the graph, Jeff, to show that in fact it actully works the opposite. THe reason is that because of all the tax breaks we give, if they spent it they wouldn't have to pay nearly as much
We tax higher because they spend less

ohioarn said...

There is a fallacy with your argument - you assume that Democrats always raise taxes more than Republicans. You are not taking into account government spending, budget deficits, or current account deficits.

Here's another idea, guys. What if the increased taxes and gov spending by liberals took 5-10 years to trickle through the system to the point of slowing down GDP? Then the blame gets all mixed up.

Whalertly said...

"There is a fallacy with your argument - you assume that Democrats always raise taxes more than Republicans. You are not taking into account government spending, budget deficits, or current account deficits."
--Notice that I allowed for the Bush tax raise when he realized the economy was going in the shitter?--

"Here's another idea, guys. What if the increased taxes and gov spending by liberals took 5-10 years to trickle through the system to the point of slowing down GDP? Then the blame gets all mixed up."
--1-2 year should be the turn around, there is no reason it would continue to grow/shrink unless they were causing it--

Ander said...

Sorry forgot about this... Well that's an extremely complicated question I have been thinking about for over a year. There is a big problem with paper money, debt money, gold money, and just money itself. Money is supposed to be an arbitrary measure of value. An idea of sort. That idea can manifest itself through all these financial products or money created with interest on it, or gold, or it can simply remain an idea that people share. When you try to arbitrarily manifest that idea you run into a lot of problems. There are different theories of money but its generally accepted that the amount of money in circulation is supposed to represent the total amount of goods and services available. Well what about goods that are consumed and do not hold value? Food for example, when harvested has a price attached to it and its value in money is created. After it is eaten, the money still remains but the good is no longer available. Prices are always determined by other humans as well which means that certain people have certain privileges over others. Price fixers essentially. I could keep going with the other problems, but the point is its a very very difficult question. Participatory economics and direct democracy seem to be headed in the right direction but basically the problem comes to the core of neo-liberal economics and the way we fundamentally produce, distribute, and consume things that people work to make.

Jeff Lehner said...

The chart doesn't demonstrate anything. It shows GDP growth over a specified period of time without taking any economic events or policy decisions into account - for example, Bill Clinton's cap gains tax cut in the late 90s that helped fuel the stock market's rapid ascent. A Democrat tax cut for investors - counterintuitive, right?

Whalertly said...

arguably my overall point was to show that Dems are statistically more likely then Reps to help the GDP

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