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Monday, September 28, 2015

Flat Tax vs National Sales Tax: Which is better?

Tax Reform is a major topic during most Presidential elections. Politicians seek to capture more voters with their position on taxation. Of course, most individuals love to pay taxes! Well, most voters would love to reduce their tax liability. This desire opens the door for the opportunity for many politicians to pitch their tax reduction campaign pitch. The tax reduction campaign typically falls under two camps:  (1) The implementation of a Flat Income tax, or(2) the implementation of a National Sales Tax. The question remains: Which one is better?

Flat Income Tax or "Flat Tax"

The Flat Income Tax, simply stated, is the notion where there is one tax rate percentage. For example, if family earns $100,000 per year, and the flat tax was 5%, their tax liability would be $5,000. Proponents feel this tax is "fair".(this is not about the National Sales tax called the "Fair Tax, that shall be discussed later in this analysis) They feel this way simply due to the same tax rate is charged to all. Is this a good deal?

As with other taxes, it ultimately reduces the free market actor's ability to consumer or save. It matters not if the actor's rate is the same as others in the marketplace, the ultimate effect is the same: The individual has fewer dollars to spend or save. For business owners, the income tax reduces the business owner's ability to invest more into the enterprise. That flat percentage must go to the State first, as the lost opportunity cost of investing back into the business reduces the businesses chances for long term success.

National Sales Tax

The other type of tax reform proposal deals with the national sales tax. There are varieties of this sort of form of taxation, one of which, is known as the "Fair Tax". While this analysis does not dig into the details of the "Fair Tax", thus it is not a specific critique of the "Fair Tax" per se. Supporters of this sort of tax state that its superior to the income tax simply because there is no income tax! Yet, the National Sales tax is still a tax on income.

Consider this example: A business owner operates in a region that has a National Sales tax. This tax is taken at the point of sale, as this is how it is sold to the public. If a final sales price is $100, and the sales tax is 8%, or $8, the business owner actually keeps $92. In this case, it is a tax on income.

Other Consideration: Tax on Capital Gains

Capital Gains tax is another factor in this discussion. Capital Gains is when an asset is acquired, held for a certain period of time, then sold at a higher price. At that point, the sales proceeds, the gain(acquisition price net against the sales price), is taxed.

There are several issues regarding this form of taxation. First of all, the actor acquiring the asset, is using funds that have been taxed. So, once the asset is sold, it is taxed again, exposing the actor to double taxation. The preference would be for the actor to hold the asset longer than usual depending on the amount of tax applied at the time of the sale due to the possibility of double taxation. Secondly, it still is a tax on income, but accrued income. For example, if one purchases an asset for $100, and holds it for 10 years, and it grows in price to $1000, the gains is taxed. But, the tax is based on the accrued income for those 10 years to reach the $1000.  It is not taxed each year as the "value" of the asset grows. Thus, it is a form of income tax, but its not taxed on the income in the year it is actually earned.

Conclusion

Both the flat tax and the sales tax are taxes on income. The economic implications are, as it is with all sorts of taxation, on the original factors of production: Land, Labor and Capital. Both forms of taxes, to include taxes on Capital gains, adds additional costs on capital, making it difficult for those starting out to move up the socioeconomic ranks. 




Cafe Hayek: Where Labor Goes

An excellent blog entry from the brain trust at Cafe Hayek on the following topic: Where Labor Goes

Napoleon Hill: Success Principle-Going The Extra Mile

Donald Trump Officially Announces Universal Healthcare Plan - " Governme...

Friday, September 25, 2015

Jim Rohn - Walk away from the 90 percent

Inflation: What is it?

There is a common theme for the definition of inflation. This theme usually states that inflation is defined as "rising prices in goods and services". With that definition, economists, financial experts, and others, always advise their clients to "hedge against inflation". So, in short, they are concerned about the spending power of their client's money. Back to the definition of inflation: Is this really the definition? Is it precise?

Let us take the common definition again: "Inflation is the phenomenon of rising prices in goods and services." However, let us suppose that a gas station is short in its inventory on gas. They normally anticipate the delivery truck to come once per week, yet this week, the truck does not arrive. In this case, assuming the demand is the same, or it's increasing, the gas store owner will raise the price. Is this inflation? 
Yes, prices have increased, and yes, prices have been inflated. But, the prices are being inflated due to the law of supply and demand. This makes the common definition of inflation imprecise. 

What is Inflation?

The more precise definition is based on this example. Suppose the central bank increases the money supply or money stock. Those first in line to receive the money can acquire goods and services before others can pick up those same goods and services. In doing this action, the first recipients drive up demand, thus driving up the prices of those said goods and services. It should be noted that demand was not increased until the money supply or stock was increases. Therefore, the rise in prices occur as a result of the increase in the money supply.  So, is inflation really the result of an increase in prices, or is it simply a result of the increase in the money supply?  It can be concluded that inflation simply is the increase in the money supply, deflation is the decrease in the money supply. The results of these actions cause an increase in prices or a decrease, respectively.

Price level and Price Stability

Two terms that are tossed around by mainstream economists are: Price Level and Price stability. These terms are typically used with the notion of Inflation. Starting with Price level, many economists attempt to produce math functions that can and demonstrate the price level. As one ponders this concept, there are questions that have answers that usurp the logic of this "price level" concept. What is the actual "price level"? How is it determined? Why should it be at this stated level?

Human beings are actors in the marketplace in a constant pursuit of "happiness". And, in that pursuit, voluntary exchange takes place. At times, there are items that the actors value more than others, since all actors are restrained to make choices with scarce resources. If a vast majority of actors in the marketplace prefer to purchase Item (A), in contrast to Item (B), then the price of item (A) will rise, and subsequently, the price of Item (B) will drop. In short, with this example, there are two price levels!  At this point, economists will aggregate all the items, and determine the price level. This exercise is risible simply because all of the items are not homogeneous in nature. And, the actors all "value" those items different, as value is subjective. This makes the notion of price level highly fallacious.

The concept of Price Stability is equally as fallacious as the notion of obtaining a Price level. The actors in the marketplace all are seeking their respective goals and happiness. Their value scales are constantly changing. For example, an individual at one point in time may value purchasing gas, over the notion of purchasing a steak. This maybe true if the person just ate a steak! How can the price of Steak be "stable", if people's desire for steak constantly change? Same with the need for gasoline? Since value scales are changing constantly, the notion of price stability is a quixotic chase.

Conclusion

In closing, the mainstream definition of inflation does not incorporate the notion of the increase in the money supply and money stock. This leads many down the incorrect path of economic analysis due to the lack of specificity in the definition of inflation.  Inflation is simply the increase in the money stock, and prices rising can occur from that money stock increase.


Do Central Banks Drive The Interest Rate?

This article discusses the notion of the natural rate of interest. It is with popular belief that the Central banks drive and determine the interest rate. This is not true, as it is discussed here:  Mises Daily | Mises Institute

Corporate Taxes: Can they "help" Grow an Economy?

Social media gives budding Economists a forum to "flex" their intellectual muscle with the wits of others. Let us take this statement as an example, as it is discussing Bernie Sanders' notion of raising taxes on Corporations:


"Actually, Bernie shows a much better understanding of basic economics than most Americans. A high maximum tax rate forces corporations to reinvest in equipment, facilities, and people rather than give the money to the govt. That's how the economy boomed under Eisenhower in the 50s. It worked then, and it would work now."
Outside of the glaring use of the famous post hoc ergo prompter hoc fallacy(Cause and effect fallacy), let us break down the issues with this statement using economic analysis. But, before this happens, review the dialogue between myself and this gentleman:

My reply:

"Bernie does not have an excellent grasp of economics. 
A maximum tax rate forces corporations to take a reduction in their overall revenues. And, taxes are not simply passed onto the consumer. Public Finance Econ peer reviewed studies and research show the Corporations absorb the tax incidence or take on the tax liability. 
Taxes impair the corporation's ability to reinvest their profits, which is simply a return on capital net the natural rate of interest. In short, the tax revenues are impacting those original factors of production: Land, Labor and Capital. 
This would loom disastrous, as compared to the 1950s, simply because we are in a Global marketplace. China, Japan, Germany, India, Brazil, South Korea and the like were not emerging economic markets. Now, they are highly competitive for scarce resources. Since they are more competitive, why on earth would one propose to increase taxes on business owners, and ultimately capital and labor? This is a foolish proposition.
The elimination of corporate tax is the ideal scenario."

The gentleman's rejoinder:

"Sorry, Robert, that's not correct. You are presuming that the max tax rate would be automatically paid by all corporations, which it would not. The tax rate is graduated. Therefore, when a company reinvests it's profits, they pay less tax on the adjusted income - which is exactly what happened in the 50s. The reason to raise the tax rates is to force companies to actually act more competitive, since the US is still richer than all of its competition. Right now, they are reaping record financial windfalls simply by holding down worker salaries and hoarding the profits. Eliminating corporate taxes is the most absurd, disastrous thing you could do to any economy."


My rejoinder:

"Taxes have a negative impact on the economy. Since Govt is a economic parasite, it does not expand the economy, but shrinks capital markets, and subsequently, the econ output. 
Side note:
When you speak of the 1950s, pre Dr. Demming's help in Japan, you refer to the US as the lone industrial power, as those aforementioned countries were not on the map as economic competitors. So, your comparison is not in proper economic context. Once those countries emerged, they placed downward pressure on final retail price of goods and services. See Japan in the auto and electronic market in the 1980s. 
Raising taxes on domestic firms would make them less competitive in a global market place. Firms will simply seek to move their capital where they can yield the highest ROI on the original investment capital, net the natural rate of interest. For example, see all the capital moving "off shore" banks to minimize the tax liability, as the US has one of the highest tax rates in the world. 
Next, ALL taxes, no exception, reduce the company's ability to reinvest into its future. Profits, as they are ephemeral, are simply a return on the inital capital, net the natural rate of intest. Raising Taxes simply shrink the number of firms in the marketplace, yielding a monopoly or oligopoly structure. This structure yields market inefficiencies, as resources are wasted. This notion is called "Dead weight losses". This is due to the increased cost of entry for firms to enter a competitive marketplace. Please note that the more competition for the marketplace, this places downward pressure on the market price. Raising taxes simply reduces competition, as smaller firms are boxed out due to increased costs of higher taxes.
With Taxes, one must look at the lost opportunity cost. Suppose John has a widget with a sales price of $100 and expenses of $75. His profit, EBITDA, is $25. At this point, John must pay the taxes on that profit. This is $25 less that could be used to purchase more equipment. Since taxes are paid on the profit, this reduces his ROI, as the profit is simply a return on capital net the natural rate of interest. 
Corporation taxes, as per our analysis, reduces the capital markets, and makes the capital markets more stagnant. Capital is needed to fuel innovation, provide technology to assist the other economic resource, labor. 
Raising taxes presumes that there is an unlimited supply of resources, and actors in the marketplace have no restraint of scarcity or time. It matters not if they are progressively graded on the margin. The economic impact remains the same. 
A final note: Please look at the economic output post Civil War up to about 1917. Govt spending was a fraction of the economy, and it yielded the best econ output in the history of mankind."

There are several issues with this gentleman's position with regards to taxation.

First of all, it is based upon the false assumption that the economy will be doomed if taxes are not collected. Government can not exist unless it is funded by taxation or borrowing. Both methods require an extraction of resources from the "private" sector. Some sort of "free market" must exist for the Government to tax or sell debt to fund its operations. This action is not done voluntarily, as it is done by force, under the guise of altruism. From an ethical standpoint, many can argue this is legal plunder. See the writings of Frederic Bastiat  regarding taxation to see further detail along this line of thinking.  Since this action, taxation of the private sector, is done by force, it leaves the "private" sector with fewer resources to use to expand the economy. Actors in the "private" sector must give up their property, by force, to satisfy the Government taxation and spending efforts. The lost opportunity cost of the actors using the scarce resources to expand their goal seeking efforts is lost to the Government. Government, as history has demonstrated, is not a good steward of scarce resources.  The overall economic output suffers as a result of this action.

Secondly, this position assumes that the Government has a first claim to individual private property. If an actor in the "private" sector starts up an enterprise, his/her idea is the starting point of this business. This idea spawns all of the subsequent activity of the raising of capital, hiring of labor, and seeing the enterprise grow into reality. The profits made are simply a return on the initial capital investment of this enterprise, net the natural rate of interest.  If the Government has first claim to the profits, this does not allow for re-investment back into the enterprise. How does the Government get first claim to this enterprise, when the idea was created in the mind of the founder of the business? How does it make sense to  In short, there is no moral or ethical claim to this creator's private property.

Lastly, this position also falsely assumes that Government spending helps grow the economy. When the Government spends into the economy, it actually drives up demand, with its involvement in that said market. The price system is the best way to economize and push scarce resources to its most valued uses. Yet, with the Government, how does it determine where those resources are most valued? It is determined by the vote of the politicians, lobbied by special interest groups. The most efficient use of the price system to allocate scarce resources is via free voluntary exchange, not parliamentary vote. The latter method builds a oligopoly/monopoly market structure, as previously mentioned, it yields market inefficiencies. As a result of this action, society suffers.  Individual savings rates decline, prices are falsely elevated, resources are wasted, and much more happens when Government spends into the economy.

In conclusion, to think that the sands higher taxation of Corporations will destroy an economy is simply foolish. In fact, the opposite holds true: Government involvement in an economy will destroy it. History supports this notion.


Tuesday, September 22, 2015

Sales Taxes: Do Consumers Pay Them?

The popular belief with many mainstream economists, is the notion that a sales tax can be pushed forward to the consumers. In this analysis, I will show who actually pays the tax.

Consider the following example:
$100 price for shoes
$6 sales tax
$106 Total price paid by the customer.

In this example, most economists would state the customer "paid" the tax because the price paid was $106. However, this analysis is not complete. 

The business owner actually paid $6 to the taxing authority. Also, the final price($106) is the equilibrium price, as this is the agreed price between customer and business. The business owner earns fewer dollars, thanks to the sales tax. In short, the business owner "eats" the tax. 

Continuing on this line of reasoning, since the business owner receives fewer dollars due to the sales tax, this also reduced his profits. It should be noted that profit is simply the return on capital invested, net the natural rate of interest. Yes, the sales tax also alters the natural rate of interest, or the time preference of consumption by the business owner. Since the business owner has fewer profits to purchase more economic inputs, this alters his ability to buy things in the present, thus slowly usurping his operation.

Conclusion

The sales tax is not passed forward to the consumer. It is paid for by the business owner, and it impacts the nautural rate of interest. If it could be simply passed forward, consumers would just pay it! Of course, this is not true, as consumers have a limit on what they can spend. Sales Tax increases hurt the business owner's ability to re-invest into the factors of production: e.g. Land, labor and capital.

Thursday, September 17, 2015

Value: From Where does it come?

What is value? For centuries, many thinkers pondered this concept. Economists from Adam Smith, David Ricardo and many others attempted to answer the famous, "Diamond/Water" Paradox, as this was related to the notion of value. Why are diamonds more "valuable" than water? Yet, water is needed for the survival of humans? This sort of questioning was central to these thinkers process in attempting to define "value".

Fast forward into the 1800s, and the seminal work of Karl Marx, "Das Kapital".  Marx argued that the value of the end product, was based upon the value of the labor that was used to bring that product, or service, to "market".  While Marx was not the first one to propose this notion, as Ricardo and Adam Smith had a similar position, many followers of Marx strongly believed that labor defined the value of the end product. And, these followers also believed the "Capitalists" were exploiting the workers by not "sharing" in the profit of the workers labor. 

Price: Does it determine "value"? 

Many individuals take the position that the higher the item's price, this, in turn, means the product(service) is "valuable".  Consider this example: Suppose one purchases a Diamond for $10,000, and a bottle of water for $1.00. For human survival, is the diamond more "valuable" than the water? Of course not! Yet, the diamond has a higher price! With conventional thinking, or the way the previous thinkers opined, the diamond was more valuable. 

In short, price has little or nothing to do with value, per se.  The retail price sold also does not express the actual labor used to make the product. Let us consider this example: Suppose that a store has more than its supply of bottled water. The store decided to lower the price from $1.00, to 50 cents due to excess supply of bottle water.
Prices are simply a tool to communicate to parties involved in voluntary exchange to other things: scarcity and value relative to other resources. So, yes, it is related to value, but it does not express value soley.

The Marginalist Thinkers figure it out

Thinkers in the late 1800s began to re-examine the Diamond vs Water paradox, as it relates to the notion of value. Thinkers like the following: Stanley Jevons, Carl Menger and Leon Walras, worked independently and drew similar conclusions regarding value. It was determined that value was subjective, and the end product or service did not determine the price from the value of its inputs. Since value is subjective, it simply can not be quantified on prices alone.  It is all based on how we "rank" those items in order of preference.

Conclusion

Value is something that we as individuals subjectively rank, file and view in our minds. This is based on other items outside the scope of economic analysis. It drives deeper into the beliefs, morality, psyhcology and etc of us. 

David Stockman-Debt Markets Unstable and Tottering

The Drug War Makes Border Enforcement More Difficult

The Drug War Makes Border Enforcement More Difficult


Excerpt: "Drug profits give smugglers the money  to do what poverty-stricken immigrants can't: dig long, high-tech tunnels with lighting and ventilation systems. A border fence doesn't secure the border when immigrants -- and criminals -- can tunnel underneath it."

Wednesday, September 16, 2015

Walter Williams Explains the Free Market

Is Capitalism Moral?

New Video with economist Walter Williams! -> "Is Capitalism Moral?"Is capitalism moral or greedy? If it's based on greed and selfishness, what's the best alternative economic system? Perhaps socialism? And if capitalism is moral, what makes it so?Walter E. Williams - Townhall.com Columnist

Posted by PragerU on Monday, September 14, 2015

Tuesday, September 1, 2015

Savings vs Consumption

Consumption is neither good or bad. Ultimately, we will all consume.  However, it is when we consume that makes a difference. Also, in that choice, we delay some consumption things we acquire into the future, and that is called "Savings".  Savings is needed to "invest" into capital goods, education, technology, and the like, in order to make the future production grow.

This topic naturally opens up the door to the notion of the natural rate of interest. The natural rate of interest represents the time preference of consumption today, as compared to the consumption in the future. The Natural rate of interest is an important tool for entrepreneurs in the Capital Markets to accurately "price" out their services.

When interest rates are "price fixed" by the central banks, the same results happen as it does with other goods when Government mandated price fixing occurs: Shortages or surpluses take place in the marketplace(i.e recall the long gas lines in the 1970s )Individuals in the society can not valuate properly the prices, as it sends mixed signals on the allocation of those goods and services.

Prices act as messengers telling the individuals in the marketplace on how to allocate their individual preferences.  The result of this price fixing reveals in the drastic boom and bust economic cycles, as witnessed in 2008 in the Real Estate/Capital market.

In summary, Savings and consumption are both needed to grow an economy. Ultimately, it is production that drives the economy. Savings, if invested into those capital goods, can help make production more effective.