Economics You Can Relate To

Saturday, September 18, 2010

I'm going to explain something about tax policy that liberals like Obama don't seem to get. I'm going to use some examples that each of us deal with on a regular basis. Now, liberal Obama supporters may want to read this slowly or at least take notes because it's extremely complicated. Let's begin.

First, keep these complicated math problems in mind because they will make economic sense soon enough.

70 x 1,000 = 70,000

25 x 10,000 = 250,000

Now, everyone should be able to agree that those 2 multiplication problems are correct. I'm sure we all know that 250,000 > 70,000. Keep that in mind as we continue.

Ok, most of us don't work for congress so we don't have the ability to just vote ourselves a pay raise the way they do. When times get tough for most of us there are basically only 2 options. Get a second job, (which many of us can't do, or find for that matter), or cut back our own spending on non-essentials. Our government obviously doesn't even think of the less spending option. In fact many of them think the answer lies in more spending.

Let's use a scenario we all face regularly, like grocery shopping. When you go food shopping there are decisions we have to make regarding our purchases based on the money we have to spend. If you're like most of us you have to stay within a certain budget in order to get the most food for the least money.

How do you do it? Sale items and other specials, coupons, store brand instead of national brand, etc. You have to plan shopping in a way that gives you the most bang for your buck. This can apply to pretty much anything you buy.

This can apply to many other things as well, like back to school shopping. Younger kids will be getting the "hand me downs" from older siblings to limit how much you have to buy. In order to relate these situations to economics the question to be thought of is: What makes more money for a business and at the same time saves the consumer money for the purchase?

Let's use the back to school scenario again for a second. Remember the math problems above from earlier? I will continue to use the numbers 70 and 25 to keep those numbers in the front of your mind for when we tie all of this together.

You go clothes shopping for back to school. You need a new pair of shoes for your child. There is a $70 pair and a $25 pair. There may be a picture of Spongebob or Dora The Explorer on the $70 pair but which one are you most likely to buy?

Let's say the ratio of sales is that for every 1 pair of $70 shoes sold you sell 4 pairs of the $25 shoes, considering the current economic climate I think I'm actually being generous toward the $70 pair but it doesn't matter because the point remains the same.

You sell 1 pair of $70 shoes in the same time frame that sells you 4 pairs of the $25 shoes. That means for every $70 you make with the more expensive shoes you make $100 off the cheaper shoes. Even though each consumer spends less individually, you make more money in the end off the cheaper shoes.

Now let's take the supermarket as I'll bet most of us have to buy food pretty often. Those of us with kids and larger families, have to be even wiser about our shopping than most others.

Well, what do you look for? Sale items, generic brands (as opposed to the national ones), items with coupons etc. Most of us are in there looking for the best deal for our money and that requires paying a little bit of attention to what we are buying.

Supermarket's know this as well. They know that they will sell far more sale and generic items than the other stuff. How do they make any money? The answer again lies in volume. For example (again using the numbers 70 and 25 as a base to make a point): you're buying yogurt, there's a .70 yogurt and a .25 yogurt, which are you going to most likely buy?

The .25 product is going to sell 10 times as much as the .70, it's the entire logic behind having sales in the first place. So the store will make $2.50 with the cheaper for every .70 made with the other products.

Why do you think WalMart is the #1 retailer in the world? How can they make the most money when they tend to have the lower prices? Well, now you understand how. Now for the fun part. Here's where we tie this into tax policy and destroy the logic of the high tax progressive liberals.

Taxes, politicians don't like paying them, but they love raising them. Business owners, especially small business owners, pay the tax rate at the personal income rate the same way you do. For a small business owner to make $200,000 + is really not all that much. If you are too anti-business and go after the businesses they'll just pass the increased costs down in other ways, (like lay-offs). It's that business owners profits that are used to expand the business and keep all of us collecting paychecks when we work for them.

Lower taxes boost revenues and make more money for the government for the same reason that the lower priced items make more money for the retailers. Lower taxes boost revenues because it gives more money to businesses for investment in jobs. Private job growth leads to more tax revenue.

It costs money to create jobs, just look at how much money all of these government jobs from stimulus are costing us. Google "stimulus jobs cost" and you'll see plenty of stories related to what I mean.

25% tax rate causes business revenues to rise, this leads to more expansion and investment and therefore more jobs. A 70% tax rate cuts business revenues to the point where there is far less money left in a business to invest and expand, the result, less jobs.

Less jobs means more people taking money from the government, (unemployment, food stamps, welfare, etc.) Less jobs means less revenue for the government, (less people paying taxes from their paychecks). This makes the unemployed a double dip against the revenues of the government.

Government jobs, (which every single stimulus job is), are also a drain on the revenues of the government. The government pays you with money it has to take from the private sector, (or print which in excess just leads to inflation down the road). The private sector keeps shrinking and the government bogus jobs keep growing, why do you think the debt is exploding?

Politicians, who in many cases make as much or more than the business leaders they love to bash, generate no revenue for the government. Workers in this country have to lose money out of every paycheck to create the paychecks for politicians. Also, unlike them, none of us can vote for a pay increase to ourselves. Increased pay is usually a reward for good work, can you think of many in Washington D.C. currently who qualify? Yet they do vote themselves raises while they have the audacity to vote against a social security increase for our seniors.

The increased taxes of Deval Patrick haven't worked out so well for Massachusetts. He inherited a surplus from Mitt Romney and after raising taxes and spending we are now in deep deficit with less jobs. A millionaires tax hasn't worked out so well either.

"The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million" - WSJ

Now, at the state level, it's as simple as millionaires moving out of state to avoid a particular states soak the rich tax policies. The left may try to counter by saying that at the federal level every state's millionaires tax will hit regardless of state. There's more to it than that.

A state millionaires tax affects millionaires as individuals. At the federal level it will affect wealthy business leaders. The end result, no private sector job growth and therefore reduced federal revenues as opposed to increased revenues.

Without job creation you can take 70% away from the wealthy but there won't be enough of them. Lower taxes will spurn more private job growth and less people will have to be paid by the government. Non-government job creation sparked by lower tax rates creates more of a taxpayer base and therefore far more people to tax at the lower rate.

The end result is higher revenues with lower taxes, that is the results of the Laffer Curve. The other aspect is cutting spending, you have to do it during a recession, THE GOVERNMENT SHOULD DO IT AT ALL TIMES, recession or not. Sometimes the key to making more money is simply spending less. If you can't vote yourself a raise and you want to save money the only thing you can do is spend less.

Taking $1.00 from a thousand people makes $1,000. Taking .25 from 10,000 people is $2,500. Therefore, when it comes to tax policy and spending it's true that bigger isn't better. Just as this country's government was founded on the same principle. When it comes to government's role in our lives, bigger isn't better. Don't expect progressive liberals like Obama to understand that though.


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