Some Common Cents For Friday November 17, 2017

November 17, 2017, by John Norris

In case you didn’t pick up the November 7th copy of Pravda, you might have missed the 100th anniversary of the Bolshevik Revolution. This was ultimate act in a year of great turmoil within Russia which resulted in even more years of civil strife and decades of economic mismanagement. While Lenin and his proletarians were passionate and idealistic, it is safe to say they didn’t completely understand economics.

Apologists for the former Soviet government tend to point to the great economic advancements Stalin seemed to accomplish during his brutal tenure. To be sure, there might be an argument to be made for centralizing capital in an underdeveloped, irrelevant, fragmented, and/or poor country, as it creates an economy of scale to effect economic growth.

Perhaps that is a reason why the vast majority of countries who adopted Marxist-Leninist or Maoist economic thought have been largely exactly that: underdeveloped, economically irrelevant, fragmented, and poor. That or forced to adopt such economic policies at the point of a gun. After all, there is no need to centralize capital to create an economy of scale when there is ample scale to start. Heck, I can’t think of an exception to this “rule.”

Dull stuff this, but it has a point.

This week the House passed a tax reform bill of some measure. There has been no shortage of criticism, with most seeming to take on three primary forms: 1) it benefits the rich more than middle class; 2) it costs the government too much money, or; 3) interestingly enough, the removal of the deduction for state and local property taxes hurts disproportionately from high tax states.

Which one is it?

First, the highest taxed states tend to be the wealthiest. Of the 10 states with the highest local tax burden, all but one of them had a per capita income level higher than the state median in 2015. These are in order of tax burden with the 2015 income level in parenthesis: New York (15), Hawaii (2), Vermont (20), Maine (30), Minnesota (12), Connecticut (5), New Jersey (4), Rhode Island (19), Illinois (18), and California (9). So, it benefits the rich who tend to live in high tax states which are hurt by the tax reform? I am not sure I get the argument, but okay.

Second, it costs the government too much money? I suppose I am just wondering why that is an issue for anyone. Shouldn’t the goal of any tax reform package be to generate more societal wealth? If so, it would seem to make sense to put (or leave) more money in the private sector, which seems to have a better track record of creating wealth than the government. Further, there is a very strong positive correlation between economic growth and tax receipts.

Of course, you could argue the highest taxed states are also the wealthiest. Perhaps more taxes leads to more economic growth, weirdly enough? Well, maybe or maybe not. You have to remember, the burden in the most highly taxed state is still significantly less than the Federal. Second, there seems to be less friction on state & local taxes than those we send to Washington. The money more immediately goes into things like roads, schools, and other projects which directly benefit the local community and economy. After all, you know where the potholes are much better than the Congress…if you catch my drift.

In fact, you could probably argue we have our tax system completely upside down in the United States. On its face, it would appear as though we should probably increase our state & local taxes and decrease those we send to Washington.

Cost Washington money? Hmm. It would seem reducing Washington’s take of our wallet would enable (here in town) Montgomery and Birmingham to increase theirs while potentially reducing the public’s overall burden. The evidence suggest that would be just what we need here in Alabama.

Obviously, this is all theoretical, bordering on mental gymnastics. Still, our tax code is far too Byzantine and clever by half, and, according to the IRS’s own estimates, costs the US economy something like $400 billion annually just to comply.

And…and…who do you think benefits the most from all of this nonsense? The rich or the poor? So, how exactly does a flatter, more transparent, and less complicated tax code hurt the poor more than the rich? It is nothing if not food for thought. What’s more, I benefit professionally from a complicated tax code and I still think this way.

I suppose when you boil it down you could say I am extremely leery on policies, codes, and procedures which put the money and power in the hands of a central authority. History suggests that is when the bad stuff starts happening.

Consider what I submitted to the newspaper for my column for next week.

In case you missed it, folks around the world recently observed the 100th anniversary of the Bolshevik Revolution in Russia. While it wasn’t a massive celebration, plenty of commentators were far more, um, objective, bordering on sympathetic, than they would have been when I was a kid. Back in the day, communist revolutionaries were the embodiment of evil. Today, it seems some people view them as well-intentioned ideologues for the masses.

Hey, what’s not to like? Marxist favorites like “from each according to his ability, to each according to his need” have a certain appeal, indeed. They sound great, don’t they? Particularly when your needs exceed your abilities, right? I mean, who wouldn’t rally behind such a platitude when their wants exceed their capability to attain them?

Make no mistake about it. Unless you are Jeff Bezos of Amazon.com fame, there is someone in the world wealthier than you are. With that in mind, what would be the most effective way to make you as rich as he is? I will spare you the trouble: it is taking roughly half of Bezos’ net worth and giving it to you. I would be willing to bet a plug nickel you would be okay with that. How about Jeff? Probably not so much.

The problem with the redistribution of wealth over time is essentially human nature. Life is basically a conflict of interest involving the obtaining of scarce resources for our use as we see fit. Allowing the masses to determine how we use our wealth undermines the effort we exert in getting it. In no uncertain terms, depriving an individual of the rewards of their work will eventually deprive society of the work which generates the rewards.

This concept is freshman economics, at least it was in 1987.

The price of human labor, and therefore wealth creation, is subject to the law of supply and demand just like the price of hamburgers. What if the government determines restaurants can’t charge more than, say, 25 cents for a half-pound hamburger, how many do you think they will make? More or less than the market demand?

With this in mind, what if the powers that be decide the absolute maximum amount you can keep in return for your economic efforts? Regardless of what you might say publicly, you will work as hard as you need in order to make that specific amount, and not a minute nor a drop of sweat more.

For instance, suppose Washington decided to tax all personal income in excess of $868 per week at 100%, a little over $45,000 per year. After all, that is currently the median ‘usual’ weekly earnings for an American worker. Would this significantly change the work habits of a part-time cashier at a fast food restaurant? Probably not. However, what of the cardiologist or orthopedic surgeon? Would they perform the same number of operations? Maintain the same patient load?

I think you get the picture.

No matter what politicians tell you, if the price ceiling for any good or service is less than the market equilibrium there will be a shortage. Free healthcare and education for the masses? I don’t care how well-intentioned such proposals are, the shortage will be either huge, immense, or massive. Take your pick.

In the end, 100 years later, it is safe to say this of the Bolsheviks and their Revolution: we can debate their true intentions for hours and their ignorance of economics for about a second.

 

Have a safe and Happy Thanksgiving.

 

John