Divine Neutrality, Blog. Science, Philosophy

Save Prosperity

June 27th, 2010

Save Our Prosperity. Tax Ourselves

blueCurves1991
The essential premise: Prosperity is desirable.

Austerity is undesirable. Everyone wants prosperity. Austerity brings violence and unrest.

What is prosperity?

Prosperity is the ability to buy what you need – or what you may not need.

It is everyones desire – this ability to buy what you need; having the money to pay for it.

When there is much buying and selling we have prosperity. Those are times when people are employed. They sell their time and buy goods and services with their earnings. Thus causing other people to be employed and, themselves, to buy things. Prosperity is connected to economic activity; the vigorous exchange of goods and services.

To be able to buy things is the ultimate measure of prosperity. So to ask for prosperity is to ask for economic activity.

Of course, the benefits of economic activity may not fall equally on all, but those who prosper do so from economic activity. Governments try to create prosperity. Adversity drives Governments from office.

Fundamental equation:

spending minus  revenue =  deficit must be borrowed

Any government – municipal, national – is an economic unit. During the year it spends an amount called ‘spending’. The taxes and the fees it collects are its ‘revenue’. The difference between these two is called the ‘deficit’. A negative deficit is called a surplus.

The deficit is the amount of money that must be borrowed in order for the government to pay its spending bills for that year.

Government borrowing takes the form of bonds. These are promissory notes sold on the open market. In the U.S. all such borrowing is done only with the consent of the electorate. It is we who permit government to borrow; either directly, by vote on a bond issue, or indirectly as when Congress raises the Debt Limit.

Fact: Government spending increases prosperity.

Government spending increases economic activity just as the spending on goods and services of any other economic unit does. The government creates jobs via the contracts it lets out to private contractors. Because the government purchases them, goods and services are produced. People are employed. This increases their ability to buy. Prosperity is fostered by government spending. Thus spending cuts decrease prosperity.

Fact: Government deficits destroy prosperity – eventually.

A continuing deficit means more borrowing each year. What is paid as interest on past debt – the debt burden – mounts. The mounting debt burden makes lenders, from whom the deficit money is borrowed, wary. They stop lending. Not being able to borrow, the government will not be able to pay its bills. Thus will its spending be forcefully curtailed and austerity ensue. An object example is Greece in 2010, 2011, 2012…

Continued prosperity demands:

since government  spending increases prosperity,
1. that spending not be cut

and

since government deficits destroy prosperity,
2. that the deficit be erased

Is continued prosperity then possible? Can we possibly have both government spending and a lower deficit?

The answer is yes. It requires attention to the third term of the Fundamental Equation: revenue. According to that equation the deficit can, indeed, be erased and spending not be cut. It’s possible if revenue is sufficiently increased. i.e. if new taxes are imposed to furnish that increased revenue.

Suspect premise: Taxes decrease prosperity.

This premise is widely held. It’s expressed in the slogan, “No new taxes”. The rationale for this premise is simple: A tax is money removed from my earnings. I’m left with less to buy with. My prosperity is decreased.

That’s the rationale.

My prosperity is, indeed, decreased but the general prosperity is not decreased! The government spends that money on goods and services, albeit not the ones I might have chosen to spend my money on. So general economic activity is maintained and thus so is general prosperity.

Proposition: Selective Taxation Increases Prosperity

When I am taxed more, I buy less. Not everyone, who is taxed more, buys less. Some, when taxed more, simply own less. Their buying continues unabated. These are people most of whose income feeds a portfolio of investments – money itself earning money. Their income is sufficiently large that spending on goods and services is little affected by taxes. The wealthy don’t buy less when they are taxed more.

It is they – those who don’t buy less when taxed more – who must be taxed still more.  Because these people are effectively taking money out of the circulation stream.

The wealthy sequester their earnings. Most of their earnings are pulled out of the circulation of money. They accumulate safe government bonds that pay a stable interest. Effectively their money is hidden under a mattress. Not spent on goods and services.  In the arcane jargon of experts: “as more money becomes concentrated at the top,  aggregate demand goes into a decline”.  From Joseph E. Stiglitz  “The 1 Percent’s Problem” in Vanity Fair, May 2012  Adapted from The Price of Inequality,  W.W. Norton & Company, Inc. (U.S.),  Allen Lane (U.K.) 2012

So increasing revenue by taxing investment – capital gains, interest, financial transactions – far from decreasing prosperity, actually contributes to it! Money that the rich tax payer didn’t spend on goods and services is spent on goods and services by the Government. Taxing capital gains augments economic activity. It swells general prosperity.

So increasing revenue by taxing investment – capital gains, interest, financial transactions – far from decreasing prosperity, actually contributes to it! Money that the rich tax payer didn’t spend on goods and services is spent on goods and services by the Government. Taxing capital gains augments economic activity. It swells general prosperity.

Thus increasing taxes (government revenue) can both erase the deficit and preserve general prosperity. But the taxes must be levied judiciously – not on wages but on rents.

Stiglitz partitions earnings into two: earnings by rent and earnings by wages. Rent: the earning of money by virtue of ownership. As opposed to wages which is compensation for time spent in doing something saleable. Rents = mortgage payments, capital gains, interest, royalties, loan fees, property usage fees, private bridge tolls… Wages are earned by farmers, office workers and their bosses, pharmacists, factory workers, lawyers, bar maids, scientists, teachers, artists, … i.e. remuneration for time spent on performing a task for pay.

It is best done by taxing earnings that are not directly spent on goods and services. Taxing portfolios of ownership holdings. Taxing the ‘rent seekers’. Taxing capital gains. The current 15% capital gains tax should be raised to 85%. Taxing wealth. What is required is a severe skewing of the tax schedule. Tax those who can best afford to pay taxes; those who use only little of their income for spending.

The wise among the wealthy will know that this is the best way to preserve their wealth against the threat of anarchy that public austerity always poses. But wealthy or not, to save prosperity we must tax ourselves.

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Comments

  1. 1

    I am totally in agreement with you, Marvin. And I read a generosity of spirit between the lines. Many others are only looking out for Number One, they’ve got theirs now just want to be left alone.

    By coincidence, a recent article in the NY Times discusses what is happening in Ireland following austerity measures there: http://www.nytimes.com/2010/06/29/business/global/29austerity.html?pagewanted=2&th&emc=th There’s not exactly violence and unrest there, more like a lot of grumbling and low-level anxiety, unlike the Greeks who are taking to the streets to show their anger at the economic measures being put in place.

    Years ago I was traveling in Latin America someplace and witnessed the physical separation between extremely wealthy people living in guarded compounds with high walls and armed security guards, surrounded by huge areas of squalor and misery. Inside, immaculate white marble floors, bubbling cool water, air conditioning, ease and quiet luxury. Outside, dirt, heat, noise, bugs and disease.

    You are so correct in saying that money needs to move in order to add to overall economic vibrancy and prosperity, whether by commerce, taxes, philanthropy or by government spending. Stagnated money just makes for sluggishness, money needs to flow, not be dammed up in goods for the pleasure of a few.

    Rich people: pay attention to the practices of fishermen who catch and release. You built a multi-million dollar empire? You bought low and sold high? Excellent! Take a photo to remember the moment! Celebrate! Now give it back (ok, a big chunk of it anyhow) from whence it came.

    When I was a banker sometimes my clients would complain that they were paying so much in taxes. I’d sometimes tell them (if I knew them well enough and thought they wouldn’t smack me) that if they’re paying a lot in taxes, it’s only because they’re earning a lot, and that’s a sign of success! Fair enough, be smart about taxes, but even if it’s two steps forward and one step back, you’re still ahead. And you’re improving the lot of everyone around you, with roads, libraries, schools, you’re supporting it all with your taxes. (The less lovely side is that, of course, you’re also buying guns and tanks.)

    Perhaps a larger question is …who is wealthy? I know people who own several homes, have a garage full of fancy cars and pull down an annual income in the seven figures, who lose sleep worrying that what they have isn’t enough to meet their needs/wants. And I know retirees who have no nest egg whatsoever and experience abundance on a weenie Social Security check. Once the basic needs of food, shelter, health and a modicum of comfort are achieved…well, many people feel gratitude with every breath.

    Which is for sure a whole other story.

    - Connie @
  2. 2

    This comment is on your presentation about taxes, spending and deficits. To really say what happens with these variable requires an analytic framework. Thus are we at full employment or do we have significant unemployment? How do we bring growth, savings and investment into the picture? Suppose we are at full employment and the economy is growing, taxes equal government expenditure and savings equal investment. Are we not in prosperity? What we do in a recession requires an analytic framework Theories of savings, investment, the supply of money and the demand for money. (A theory of the supply of money goes way beyond the mechanism of monetary expansion.) A full development of all this cannot be laid out here but is available in many texts. I wonder if wikipedia might have something on these topics. I must add that a analysis of taxation is called for as well. We can talk about this.

    - Jacob Michaelsen @
  3. 3

    What a grand piece of work. I will study this as the market crashes along with my IRA and ponder the future.

    - Patrick Darrough @

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