The question is does the tax system prevent that 125K/year job from beign created and the answer is simply: not often enough to make up for the lost revenue.
You make “starve the beast” sound a lot like shooting wife in the boobs so she will go in for a mammogram.
It distorts that motivation, there is no indication that lettingt you keep 65% of your marginal income instead of 60% of your marginal icnome makes enough of a difference to make up for the loss of that 5% rate.
Okay, I plotted this out, but I’m not sure what Sage Rat uses to post it.
Basically, the 0 and 100 are correct, no revenue. In your example, revenue is 0 at 0% and is 0% at any value higher than 34%. That’s the point where all three players stop selling.
So what happens in between? For this example, government revenue increases linearly from 0% up to an absolute maximum at 24% with a revenue of $97.75. After 24%, the first player drops out and revenue falls quickly, but not to zero, it falls to $70.8. If we were to play around this area, we could see a massive loss of revenue doing from 23-25%. But then starts climbing again. In fact, it reaches $91.45 at 31% before the next player drops out. Revenue falls again to $40, and then drops off to zero as each player drops out after 34%.
So this scenario shows how there are going to be local maximum and minimums between 0 and 100%. There were three points where revenue fell after raising taxes, so only three places where lowering taxes would increase revenue.
There other mistake in this example, where you call it “deadweight loss” is assuming that when Bob can’t get $100 for his widget is curls up and dies. He still has a $100 widget and $200 is cash. It hasn’t vanished. He still has a desired for widgets, and still has a widget to sell.
You know what, it’s also a bubble. You have an economy based on people passing around something hoping it gains in value.
Bob’s new widget is only valued at $145 if someone else is willing to buy it for $145. It’s the same mistake people make when using the Dow to show economic growth. Last month Bob valued Apple stock at $265 and found someone that bought it at $200 willing to sell. But did we add $65 to the economy? Not if the rest of the world values Apple at $245 as it does not.
I don’t think you understand the concept of value. Value is not intrinsic. It is always determined by what someone is willing to pay. A diamond to a man dying of thirst in the desert has no value. Nor does a glass of water to a man standing in front of a mountain stream.
This IS how economic growth happens - goods are transformed from low value to higher value uses. It can be done by putting raw materials together, or simply through trade of existing goods.
And yes, stocks go up and down based on our estimation of the value of a company. No one values the stock itself - ghat is just a piece of paper. They value the company. When a stock goes up in price, that means that the people trading it believe the company has increased in value, or that the stock of the company has increased in value because it’s more liquid, or because the dividend on it has gone up, or whatever. Either way, the stock represents real value. But that value isn’t determined merry by goods in some fixed relationship. It’s totally situational, and determined by the marketplace.
My example is an example of true economic growth. It is not a bubble.
If I may offer a real-world case: I’m getting married this fall. It seems likely that come 2013 or so, there will be a child.
She will definitely leave the workforce for a year or so to be a mom. She will almost definitely re-enter the workforce when the kid starts school. But taxes will play a big role in deciding how fast.
Option A is for her to go back to work after a year.
Option B will be for her to stay home for two, three or four years, raising the piglet (and perhaps another one), and we live on my salary alone. That would be a bit tight, but we’ll have no debt and it will be doable, especially if she’s home cutting coupons, making home-cooked meals, shopping at Costco and helping us live a more frugal lifestyle. We could probably go to just one car. For that matter, with three of us living on my $60K salary alone, we might start qualifying for low-income discounts. She’s a genius at finding those kinds of savings.
Now in the workforce, she would easily get $100K worth of work a year … but we’d spend $20K more by losing her as a housewife. So the net benefit of her working is only $80K. Still a lot of money, so she’d likely go back to work sooner rather than later. But now taxes come in.
If the tax rate on the money she makes (the money above mine) is, say 10%, now her working brings a practical amount of only $70K (100k, -10% tax, -20k daycare, etc). Still a lot, and we’d take it.
If the tax rate on the money she makes is, say 25%, now her working brings a practical amount of only $55K (100k, -25% tax, -20k). Now we have to consider the choice between the extra $55K versus the emotional benefits of having my wife home with the kids all day (or, alternatively, she works and I have the emotional benefit of staying home!). We’d take it, though it might mean we’re a bit slower getting back to work – maybe she spends three years at home before toddling off instead of just one.
BUT … if the tax rate on the money she makes (the money above mine) is, say 40%, now her working brings a practical amount of only $40K (100k, -40% tax, -20k daycare etc) … and we’re inclined to go with staying at home until the furtling enters school.
Thus in the furt household:
if the marginal rate on the second income is 10%, the government will make 10K per year x 4 years= $40K
if the marginal rate on the second income is 25%, the government will make 25K per year x 2 years= $50K
But if the marginal rate is raised to 40%, they will make $0.
As a not-insignificant aside, as it stands now, our combined federal and state tax rate on that income will be right about 30%. If our taxes get raised much more, we’ll be closer to that 40% than the 25%.
Why would the government even take your money if it’s going to give you back the exact amount? If it did that, it would have no money to finance government operations. And you just described the most inefficient form of government transfer there is - taking money from someone and giving it back to them later. All you’ve done is introduce a middleman.
The difference in my example is that the money comes back to everyone, regardless of who sold what. So let’s say there are 1000 people in our economy. The government is perfectly efficient, and gives back every nickel of tax money, but spreads it out evenly to everyone. So now, if I decide to sell my widget and pay the $39 tax, the government will give me back 1/1000 of it, or 3.9 cents. This is hardly going to alter my decision. Yes, I’m also getting 1/1000 of everyone else’s taxes, but I get those whether I sell my widget or not. So it doesn’t change the equation either.
So what do you do? Give me a widget-selling tax credit to stimulate my sale? You could achieve the same thing by just lowering the tax in the first place. And if you give me a widget selling tax credit, that means someone else is getting taxed even more, so all you’ve done is shift the deadweight loss somewhere else.
This does not avoid deadweight loss unless the service goes back to the person who made the trade, in exactly the amount of the original tax. If the person gets UHC in the same amount regardless of his decision on any particular trade, then there is no added incentive to make that particular trade. The deadweight loss still occurs.
I did not imply that. In fact, I specifically said that for the sake of this argument we would assume that ALL the money comes back to the people from the government, and that it is 100% efficient. It makes no difference. So long as the benefit given by the government is decoupled from my decision to make a specific trade, it has no effect on that trade.
Now you are making an argument for the general benefits of government, which is a separate discussion. If you want to argue that the taxes are a good thing even with deadweight losses factored in because the government does more good than it costs us, that’s fine. But that’s a different argument. You’re still losing GDP because of deadweight losses. This just means the other benefits of government have to result in more GDP gain than what is lost due to the deadweight loss of taxation. It doesn’t change the fact that deadweight losses due to taxation exist.
Unless this is information that is hidden from the people doing the trade, and this information would change the assigned value people give to the trade, it’s irrelevant to the discussion. And most of what you just posted amounts to a statement of your own personal values. You see capitalism as a harsh, unforgiving dog-eat-dog world. I see it as the ultimate representation of freedom, where people are allowed to trade with each other freely and who live their lives without others telling them what to do. Those are my values. I like capitalism, and I’m not rich. But none of this has anything to do with deadweight losses.
You’re torturing the analogy. A commission is a cost of production. Yes, it sets the bar for which goods are profitable and which aren’t, but assuming we’re not just tossing around commissions because we feel like it, but that we’ve learned that commissions are an effective way to fund part of a necessary distribution chain, then this is no different than the raw materials cost or the cost of the capital used to finance the factory. All of these things are costs of production, and completely different than taxation.
Even if you want to argue that taxation is a reasonable cost of society’s production because it provides the infrastructure necessary for production, it doesn’t matter so long as the benefit from taxation is not tied directly to the specific decision to trade. Commission is an integral part of the decision to make a specific trade, as is the benefit of having the salesman.
Now you’re getting closer. It may be that eBay commissions are deadweight losses to each trade, and do wind up limiting trades on the margin, but on the whole eBay sets up conditions which reduce other deadweight losses so much that it results in net economic gain. But again, this is not an argument against the existence of deadweight losses. If I were eBay’s owner and someone came to me and said, “I’ve got a great idea! We’re going to raise eBay’s commission rates, and use the extra money raised to make the home page better and to make the site faster”, then my response would be, “Hmm… the increased commission will cause fewer trades. Are you sure your other ideas have enough value to eBay’s members that it will offset the difference?” In other words, I’m recognizing the cost of commission increases and demanding that the bar for spending be set at a baseline that it must recover those costs.
One more time: If you tax me $39 for that sale, but you return $50 in value to me, it still doesn’t matter as long as I get the $50 in value whether I make the sale or not. To eliminate the deadweight loss, you must couple the return in value to the sale taking place. Which government can’t do. It must deal in generalities.
Even if we accepted your hypothetical that government spends money wisely and the existence of government removes costs of production instead of adding to them, it doesn’t matter. It has nothing to do with the deadweight loss of taxation. What you’re arguing is that other benefits of government may be worth more than the deadweight loss of the taxation used to fund it, but that’s a completely different argument.
The bottom line is this: when you raise taxes, you effect decisions on the margin. You raise the threshold of value gain required for a trade to take place. That means any trades that have marginal but positive value before the tax is implemented no longer take place. That reduces economic growth.
You think bigger government makes the economy overall more efficient as to offset those losses, and that’s fine. We can debate that. But first you must accept that the existence of the taxation in the first place causes an economic loss that government must overcome before even breaking even. And furthermore, the higher the taxes go, the higher the bar gets set for government because it starts out from a position of having caused significant economic loss.
Now, there are exceptions. I mentioned in my first post that deadweight loss can come from other factors than taxation. Monopoly power, lack of information, and other market failures that prevent perfectly efficient markets. It could certainly true that a tax used to fund a government operation that reduces these other forms of deadweight loss could result in opening up more trade and stimulating growth. And clearly this happens - the maintenance of civil society itself eliminates a lot of the deadweight loss of trade. But again, the correct way to think about this is to acknowledge that the deadweight losses happen so you can make good decisions.
What if that 5% increase was to fund public pre-schools? I pay about $17k per year for preschool for one child. I would gladly have my taxed raised by 5% instead. The problem with all these dead weight examples is that it is assumed that taxes are a loss without including any benefits derived from society.
You basic assumption is that nothing the government does is value added. If the government spends 100 million on roads, they in no way can provide more than 100 million in value. 50 million on food subsidies cannot provide more than 50 million in improved health or welfare. You assume an exchange between private individuals is able to increase total value, but nothing done by the government can. Why is that?
In your example, government hasn’t averted deadweight loss. It has provided other benefits which offset the deadweight loss due to taxation. The point is that your government action starts off from a position of having added friction to trade and caused a loss. Now you have to figure out how to return more value to offset it.
This is not a trivial distinction. It’s the key to thinking about government properly. Government MAY provide benefits, but it ALWAYS has an upfront cost. Good governance takes those costs into account. When evaluating a government program, we should not start from the assumption that government is good and more government is probably better. We should start out by saying, “Is this program going to return more value to society than the value we’re losing through the deadweight loss of the taxation needed to fund it?”
And unless you think government is some magical creation which always (or even most of the time) returns more value than it destroys, the answer is often NO. In fact, if you look at the success rate of new business startups, it should be clear that most economic experiments start out at less than optimum efficiency. Business is efficient because of trial and error - experiments in management and production are tried. Most fail due to the fact that they weren’t efficient enough to return more in value than they consumed in production cost.
How often do we kill new government programs because they weren’t working out as expected? Where’s the trial and error in government? What forces exist to push government to maximize efficiency?
Do you assume that every bill that is signed is perfectly efficient in the way it achieves its stated goals? If not, then you have to assume that government in the real world is not particularly efficient. It may be necessary when it overcomes other gross inefficiencies and the deadweight losses generated to fund it, but to me that sets a very high bar for government action.
And yet, I have posted stats many times which show that in general, countries with bigger governments suffer in terms of GDP growth. So I do have somewhat of an idea. In my own country, we dramatically cut the size of government over the past 20 years, and we now have the strongest economy in the world. And we’re not propping it up with deficit financing, either.
Here’s an important thing to learn about economic thinking - it’s all about decisions on the margin. When you think of any trend that goes from positive to negative, there are always marginal cases right around the zero line. This is where change happens.
This is a very important habit to get into if you want to develop economic insights. If I raise the price of a cup of starbucks by one cent, it WILL affect the sales of coffee. This can be counter-intuitive because we tend to think about individuals and individual choice. Who’s going to decide not to buy a cup of coffee because it costs only a penny more? But in fact, it does. If it didn’t, Starbucks would have already raised the price of coffee by that cent. And then it would do it again, and again, and again, until coffee costs $100/cup. But each incremental cent does change consumption.
For example, take the supply and demand curves. If you say that small changes don’t matter, you’re saying that you can change one curve without affecting the other. We know that’s not true in the general case.
Now, economists do talk about some wages and prices being ‘sticky’ due to special conditions related to them. But by and large, economists think about changes that happen on the margin. If you refuse to do that, you’re really saying, “Hey, my demands are small enough that they won’t cause any negative consequences. The costs will be absorbed without changing anything.” That’s faulty thinking.
Oh, I agree that there needs to be a cost benefit analysis. I also think that government is far from perfect. The problem is that what good government spending does is hard to estimate in advance. Building a bigger road along an under utilized route may be a pointless boondoggle, or it may create a new economic center. But the answer is not to stop building roads.
I understand the idea of things at the margin being important, but you can’t be too simplistic. Take your cup of coffee. Raising prices from $3.00 to $3.01 will have an effect on demand, but probably a smaller one than changing from $2.99 to $3.00. And changing from 2.98 to 2.99 may actually increase demand.
Also, even if all marginal effects result in increases in economic activity on lowering taxes, they will not always offset the loss in revenues and will definitely not offset it overnight.
This is true, but it’s a different debate.
I never said it would. I’m merely point out that taxes cause deadweight loss, and that means government has a hill to climb before it can break even. It can’t be just as good as private spending, it has to be better.
Now, shouldn’t we have a massive amount of date available from Canada, where they had a balanced budget, and then lowered the GST from 7% down towards 5% before changing it all to HST.
Also, all of this theory is based on the idea that dead weight loss will lower quantity, but that’s based entirely on a “free market equilibrium.” Something that can and never will exist. The whole thing is negated by inelastic demand items. Then it’s just a matter of evaluating the elasticity of everything else. The government could easily put 30% sales tax on iPhones without much change.
So maybe the discussion needs to be about how changes in the economy shift elasticity. Looking back, the government could have generated huge revenue increasing the tax on housing sales in the run up to the bubble–generating enough revenue to pay for the impending crash. On the other side, they could repeal/lower said tax stimulating sales during the recession.
Which again cycles back to my belief that the government needs to be moving the tax rates the way they move interest rates. Crank them up as the economy grows, slash them when the economy slows. I call it the MacKnight Cycle.
I’m not sure what “5%” you are referencing. I was comparing tax rates of 10/25/40%. To try to answer your question anyway, if we assume a government-run preschool is analogous in quality to government-run K-12, we would probably be a bit hesitant to send our kids there.
The benefits to society of a given tax are irrelevant to our considerations. Even if every tax dollar was spent in a wise way on things I agree with, we’re not going to live our lives with the goal of increasing the government’s tax revenue. If the tax burden gets high enough that the remaining income is not worth more to us than the intangible benefits of not holding a second job, one of us will stay home, and the government will have to do without that revenue.
Canada’s not very good at publishing historical data, or at publishing data at all. It’s one of the most frustrating things for me, and it’s often why I wind up using American policy for analysis instead of Canadian policy - you just can’t find the data you need about Canada. It’s all behind paywalls, or it’s vague, or the government has changed the way it measures too often making the data hard to use, or it just doesn’t exist at all.
However, I can tell you that when Canada’s government was around 50% of GDP, we had a structural unemployment rate about 2% higher than yours. Our GDP growth lagged yours. Our dollar floated between 70 and 80 cents American. Our standard of living was falling compared to America. Now, with our government downsized to 34% of GDP, our unemployment rate is now 2% lower than yours, and our economy is producing more jobs per capita than yours by an order of magnitude. Our central bank is about to raise interest rates for a second time because GDP growth has been higher than expected. And, our budget deficit is below our GDP growth rate, and is forecast to be a surplus again within a few years.
During this time, we also lowered our total debt from around 70% of GDP down to under 30%.
It is? How? Can you cite a paper which shows that price inelasticity has eliminated deadweight taxation losses in Canada?
Where are you getting these numbers from? If the price of an iPhone could be raised 30% with no affect on sales, Apple would have priced it higher.
And they’re supposed to use their magic government crystal ball to know exactly when to take these actions?
Cutting taxes, in itself, loses revenue. The argument goes that it also stimulates the economy. Economic growth (more money &/or greater velocity of money) means more revenue to tax.
Now, there are reasons to have lower tax rates for lower incomes, which are the same reasons for negative income taxes & :gasp: direct cash payments to the poor. (Welfare! Socialism!) The more money someone has, the more he contributes to the consumption side of the economy.
But a lot of politicians seem to have confused that kind of tax cut with tax cuts on high incomes. Supposedly letting those with a whole lot of money keep more of their money will stimulate them to lend it (at interest) & make even more money, & this is stimulative in that their debtors will increase productivity. Well, it’s something.
What the advocates of income tax cuts fail to notice is that government spending also stimulates the economy. In fact, it can stimulate the economy in direct & targeted ways. And if taxes are both high enough & carefully progressive, it does so with money taken from other parts of the economy that don’t need as much stimulation–and avoids debt. (This is the part we’ve gotten wrong in this country; we have run government debts in good times for no good reason.)
The best supply-siders offer in lieu of the stimulative power of government pork is as follows: A few private citizens, given more money to sock away, will lend that money at profitably high rates of interest to the lucky few that can convince them there will be a positive return. This scenario offers no consideration of public misery or economic depression; in fact in a popped bubble (as in the last two years) it’s very hard to find private sector investment as too much has already been defaulted. And in any case, it places on the new businesses it deigns to start a debt burden–far more dangerous to the continued survival of a new business than a higher tax on net profits would be.
Supporting the supply-side theory may be economically rational for a few very wealthy individuals who are able to buy up much land in a depressed economy; but it does not work as advertised. Supporters of this theory are either lying or misled.
So you don’t have any data to back up your claims? Canada very recently has been lowering the GST, what results can we see from it.
Canada also kept taxes high while making drastic cuts to social services in order to balance the budget.
The balanced budget seems to be the driving factor, since after all there are still LOTS of taxes. GDP continued to grow while taxes were high, and started growing faster when the budget was balanced, BEFORE tax cuts were made. When you look at the graphs of GDP growth, I see a big increase following the budget cuts, but I don’t see big spikes following tax cuts.
Are you sure you understand deadweight loss? It doesn’t happen (or happens less) when there is inelastic demand, like with gas prices, alcohol, and cigarettes.
Apple has a Net profit Margin of 22.77% in Q1 of 2001, and an operating margin 29.48%. There are NOT operating at market equilibrium. They are selling iProducts ABOVE the equilibrium point. Adding deadweight loss would bring the price point down towards market equilibrium, isn’t that what you want? A 20-30% tax on iPhones would mean they are sold at a similar price (what consumers are willing to pay), but profits are lower, and so the real price is closer to market equilibrium.
As we said at the top, Canada has higher sales taxes, but people are will willing to buy iPhones. There is lots of room to increase taxes–increasing revenue–on products with high demand.
All of the examples in this thread are cases where there is a highly elastic demand curve. “I’ll take the job if it pays me $30k more, but not if it only pays $29k” Lots of deadweight loss there.
If instead someone says, “I’ll take that job no matter what, I desperately need health insurance to live.” We can tax them pretty heavily. Inelastic demand curve.
Funny thing about government run schools, most people think schools in general are in trouble, but that their schools are fine. But that is neither here nor there.
what I was referring to was that part of your calculation on your wife getting a job is probably, like most of us, how much money it costs to put kids in daycare/preschool. My point is that taxes are only one factor in your decision. And it is easy to say that with lower taxes you take home more money, but you also have to consider all the things taxes pay for, from social stability to a reliable justice system, to roads, and so on.
Whether you would be better off with those handled by a private organization is a separate debate.
The ‘claims’ I gave you are based on overall GDP figures. Detailed data that you’d want for a close analysis is harder to come by.
The GST reduction was from 7% to 5%. It happened fairly recently, just before the recession hit. So I think it would be hard to glean meaningful information from it so far. The broader trend of government performance vs downsizing since 1994 is easier to see.
We didn’t make ‘drastic cuts’. Most of what we did was to hold government spending growth below the rate of GDP growth, which some people spin as a ‘cut’.
There were some cuts here and there, including welfare reform in the 1990’s, but by and large Canada’s social safety net is intact.
Which tax cuts were you looking at? But you’re right - we balanced our budget first, then as the deficit turned into a surplus we could afford to give tax cuts to the people. As we paid down the debt and our interest payments dropped, we gave people more tax cuts. We chose to do this rather than to use the money to stimulate the economy with fiscal spending, or to add to our social programs and entitlements. You chose another path. You refused to cut spending when you cut taxes, your deficits grew. You refused to fix your structural problems with social security and medicare. And then when 500 billion in cuts was identified in Medicare, you chose to use the money to add on a new health care entitlement rather than use it to balance the budget.
I think our way is superior. Ultimately, we managed to lower taxes. We did it by cutting government and returning the savings to the taxpayers once the budget was balanced. What a concept.
I understand it fine, and I understand price inelasticity. What you haven’t shown is that there is so much inelastic behavior that tax increases do not have deadweight loss. You made a huge leap from, “Hey look, some prices are less elastic than others!” to, “deadweight losses don’t happen.” Perhaps you can link to a study that proves this case?
First of all, the fact that Apple is showing a profit right now does not equate to the kind of equilibrium you think you’re talking about. Second, if you raised taxes to the point where companies did not make profit, no one would invest. Third, Apple has had many years where they lost money. Fourth, equilibrium doesn’t just happen instantly. Apple’s competitors will catch up, and the market will stabilize.
This just isn’t true. First of all, we have no idea what the market equilibrium price is at this point. It is very common in the technology space for new products to ‘take off’ and return high profits until the competition catches up. In addition, the technology space is extremely expensive in terms of R&D. Apple’s cash will be spent developing the next great product, and some of that cash will be invested in losing products.
Finally, the mere existence of high profits does not mean the market is not in equilibrium. Some types of industries can post high profits in one year, and big losses in another.
You don’t know which products will have high demand until the demand develops. You also don’t know how long the high demand will last, or how much the company will have to invest to stay ahead of the competition. Your entire analysis is completely pointless.
And Canada doesn’t necessarily have higher sales taxes. Our GST is only 5%, so provincial taxes dominate. Any province that has a lower combination of GST and Provincial tax than a State’s sales tax has lower overall tax. Alberta, for example, has no provincial sales tax. Therefore, our total sales tax is only 5%, which is lower than most U.S. states.
Nothing like heavily taxing people with desperate needs…
There are very few jobs like that, by the way. Or if they are, they’re generally priced low already.
I think you’re just making up examples here. The issue is far more complex than the simple assertions you’ve been making. But if you can point me to some scholarly articles that show how inelasticity eliminates deadweight loss, I’d love to read them. I’ve actually seen research which shows the opposite - that even when you have a theoretically perfect inelastic demand, you can still have deadweight losses due to price distortion.
The best we can say is that products with more inelastic supply curves will have less deadweight loss than products with highly elastic demand curves. That’s why tobacco is heavily taxed. But there’s still deadweight loss, because the market isn’t perfectly inelastic. It’s just less elastic than others.