Wednesday, August 11, 2010

Drummond’s Rules of Economics and Politics

The coming election is about the economy, no matter what the political-party-about-to-be-hit-with-a-ton-of-voter-rage claims. Oddly, this is the same myopia which blinded the other political-party-slammed-for-missing-the-obvious in 2006 and 2008; seems to be common for D.C. to be D.O.A. on the basics. There needs to be some basic primer about how money works in political terms, so I offer the following basic rules which drive the political consequence of money:


1. Everything has to be paid for

It’s quite fashionable for politicians to promise whatever the public wants, or at least the targeted voter bloc. But sooner or later, the services and goods have to be paid for, and with real money. Delaying the inevitable only adds interest costs to the total.


2. Taxpayers pay for everything the Government buys

Don’t be fooled when some official tries to say there will be no tax increase for a program, or that it will be paid from by another government or corporation. Other governments serve groups of taxpayers who won’t accept higher taxes either, and eventually the cost will come back around to your country again and hit the citizens. As for corporations, these are made up of people who don’t like paying taxes, and so a corporate tax will result either in higher prices, lower employment, or both.


3. People never like taxes

Joe Biden is a liar and a moron. No one, absolutely nobody will pay a penny more than required in taxes. Folks will pay what they feel they must, they may make virtuous noises to feel better about paying, and they may form mobs and demand that some certain person or group should be made to pay more in taxes, but no one chooses to pay more than they believe they have to pay.


4. Politicians lie to you about how much you have to pay

Politicians will either promise that your taxes will go down, or if taxes must go up, that someone else will have to pay more. Knowing how much people hate paying taxes, no politician planning to stay in office will ever tell you directly that he expects you to pay more.


5. There will never be a system where everyone pays a 'fair' amount of tax

There are several reasons for this fact. First, it’s impracticable in any medium-to-large country, since people will constantly try to reduce the taxes they pay, through resistance, political and legal actions, or just plain evasion and avoidance tactics. Second, no government truly wants a transparent system for collecting taxes, as this will inevitably lead to comparison, complaint, argument and further questions about who gets paid and why. By playing groups against one another, adjusting one group’s tax rate up or down to make it more ”fair”, governments distract the public from figuring out how much it is really gouging them.


6. Revenue is dependent on the health of the economy more than any other factor

This is sometimes missed when planning growth and forecasting revenue, whether by companies or governments. You need a healthy economy overall, in order for your goods or services to produce revenue. For tax purposes it is even plainer – you cannot collect money which is not there. Consequently,


7. The only functional tax rate is the one which maximizes revenue with the least interference with the economy

This is not a new idea. Remember the story warning not to kill the golden goose? The idea is that you pay attention to how folks are doing before you tell them they need to pay you more money. At the very least, tax increases (and ending prior tax cuts are tax increases, semantics won’t save you) should never happen when the economy is in decline, especially during a recession, and only a brain-dead moron would consider them when unemployment is 7% or higher. To bring in tax revenue, you need to spur job growth, because only when people have jobs can you get income tax from them. And to spur job growth, you have to lower the tax rate. Here’s why – the cause of every economic crisis always comes down to consumer confidence. When people stop buying things, the economy collapses, it’s really that simple. And when taxes are high, people worry about them and spend less, which causes businesses to slow down and fail. When businesses slow down, they lay off employees, which obviously raises unemployment. A low tax rate with low unemployment is better for revenue than a higher tax rate with a higher unemployment rate, as should be patently clear. There is a floor rate beyond which revenue fails to improve, but it is undeniable that in any recession, the most effective means to improve employment, and in so doing improve revenues from taxes, is to reduce the tax rate.

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