Weekly Math Updates
February 16, 2009
Happy Presidents day. As our Founders roll over in their graves as they are remembered with honor in a country that has abandoned their principles, I thought I would post a little bit about tax policy and mathematics. A fun combination this time of year.
I hope you took the time to watch the video on the difference between a Republic and a Democracy that I recently sent out. It is ever more apparent with the decisions being made in Washington that we live in an oligarchy where a few rulers determine what is best for us in spite of our desires and wishes. Corruption is rampant and the imposition of socialism upon the nation will continue to cause declines in moral values. Our country can't take it. Politicians don't understand that to take away from people the benefit of what they produce, takes away the incentive for people to produce. We have also lost sight of the fact that when government gets involved in "solving problems", they never look at the far reaching unseen things that go along with the "solutions" they claim to see.
For example, a politician sees a shortfall in revenues and thinks "I know, we'll raise taxes in order to bring in more money." That is what the politician can see. What the politician can't see are all the repercussions of that action. I've previously lauded Frederick Bastiat's essay "The Law", but there is another you should commit yourself to read called "That Which is Seen, and That Which is Not Seen" that explains this clearly. Here's a link and the first paragraphs of the essay.
Now to taxation. That politician that believes raising taxes helps stimulate the economy doesn't understand taxation. He or she simply sees the initial short-term benefit of raising taxes.
The formula for the value a number will approach when a stream of percentages is applied to it, is that number divided by the percentage. (I know there's a mathematical name for this but I can't remember it :) )
For example, in this table (obviously a simplification), if the tax rate is 10% and we introduce a dollar into circulation by purchasing a good or service, the person receiving the dollar will pay 10 cents in tax and have 90 cents left over to spend elsewhere. He does so from person 2 and so on until 73 people have benefited from this money and low tax rate. The total tax collected by the government during this process is $1, the original amount put into circulation. The amount of money benefiting the people circulating the money though, is $10.
If the tax rate is doubled to 20%, the government still collects that original dollar in taxes, but now the citizens only have the benefit of $5 circulating through half as many people.
If the tax rate is again doubled to 40%, the government still collects that original $1 circulating, but only $2.50 circulates through the economy to a much smaller number of people.
Obviously there are things this example doesn't take into account. Some of those things would be how much people would save and not put into the economy. Obviously it is far easier to save something when taxes are low than when they are high. Money put into savings though could be loaned out by the bank for a reasonable return on investment and stimulate the economy directly by putting that money into a business producing a good or service desired by the population.
It is no secret that government wastes money like nobody else. Bastiat mentions this specifically in his segment on taxation in the above article. When government takes it upon themselves to stimulate the economy with tax money, that doesn't help meet yours or my needs. It meets the needs of the politician seeking re-election. In other words, whoever can be bought out by the politician for votes will receive the money. In our society, that means people who don't value freedom and a strong work ethic. It is those that seek an easy buck without the effort that goes into producing something of value.
There is another dark side to government though...specifically our government and it's preoccupation with debt and printing money which stems from it's dangerous occupation of buying votes.
When government sets out to right a wrong, it determines to do it by regulation and spending.
In the 1930's FDR determined that American's weren't saving enough and it was up to him to force them to do so. (Another catastrophic blunder by do-good politicians) The program promised to set aside money for people and save it for their retirement. That was seen. What was not seen was that 1) people are smarter with their own money than a stranger is; 2) a government that sees money available will spend it. Today there is no Social Security trust fund. It is a giant Ponzi scheme where current workers pay the social security of retired workers. The idiocy of the Democratic party is in promoting abortion on demand and vowing to save Social Security. They are at odds with each other because they need those workers to be productive to pay in and save the system!
Socialism doesn't work and never has. The people in charge always say, "if we just had a little more power and control it would work properly but those darn capitalists prevent us from running it right." Then they get in power and seize a little more control and move us ever closer to communism and total control and we lose freedoms and economic security. It's never worked anywhere its been tried. If you get cable, Glenn Beck is going to do a weeklong series this week on why socialism doesn't work so if you can tune in please do so.
The other major issue facing us right now is that our government has lost the confidence of the rest of the world. They're not buying the debt we're issuing because the world knows our bonds are losing value.
Last week Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances. Then he said “We hate you guys. Once you start issuing $1 trillion-$2 trillion . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
The value of an object, such as the dollar, lies in it's supply and demand. Demand is going down and the supply is massively increasing due to the printing of money in huge quantities. Glenn Beck showed this recently on his TV show and I encourage you to watch this short video clip.
To say we can spend our way out of a recession or depression is insanity. It doesn't take into account any of the underlying issues like the devaluation of the dollar or the debt interest and principle that must be repaid.
Thomas Jefferson was right on when during the recharter of the Bank Bill (1809) he said:
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