Thursday, December 9, 2010

Obama and The GOP Finally get Stimulus Right! The Benefits of Lower Taxes Explained Part I

12/9/2010 Miami, Florida – Pop in your mints…
We awoke Tuesday to some good news.  While we did not hear the tune of Kumbaya resounding out of Washington, details of a compromise on taxes between Democrats and Republicans did emerge.  On the surface it appears that this development is very promising and, dare we say, will turn out to be a truly effective form of stimulus.  We believe that it will be effective because it appears to do the only two things that a government can do to stimulate economic activity.  First, it provides a degree of certainty for key decision makers.  Currently, key decision makers had no choice but to plan for tax increases in 25 days.  Now, it appears that they can count on tax decreases for the next 755 days.  Second, and more importantly, is the nature of those tax decreases.  They include a 2% reduction in payroll taxes, which is roughly the equivalent of the government giving a nearly 2% pay increase to every worker.  It also provides businesses with a 100% tax break on all capital equipment purchased in 2011.
At The Mint we pray that this change in mentality will stick in Washington.  Over the past 3 years we have seen the government increasingly move in to manage the economy with increasingly disastrous results.  This tax deal would mean that the government is moving towards giving more power back to the people, where it rightfully should rest.
Free people are more productive.  This is simply a historical fact.  The fact is sometimes confused by applying the terms "Free" and "Democratic" to societies that, in terms of economic policy, are anything but free and democratic.
Set My Money Free!
While we will certainly read many arguments to the contrary, it is our belief here at The Mint that lowering taxes will actually increase tax revenue, all things being equal.  Why, you may ask?  We will attempt, at our own peril, to offer a simple explanation to a complex question.  

Taxes are generated by taxable events.  By taxable event we mean that money and property change hands.  These include earning wages, selling property, selling inventory, etc.  If you examine any set of economic transactions, you will find that the decision to do many of them involve a calculation to determine if it is beneficial to make the transaction or not.
To illustrate this, imagine that there are 100,000 persons trying to determine whether or not to purchase a certain car that costs $20,000 at any given moment.  Now imagine that there is a 10% tax on car sales.  Let's say that for 30,000 of the 100,000 who want a car, the additional 10% of sales tax makes it impossible for them to make the purchase.  That is $600 Million dollars of car sales that are not happening because of the sales tax level.  Given these circumstances, a 10% sales tax allows for $1,400 Million dollars of vehicle sales which generate $140 Million dollars of tax revenue.  Now, imagine that the 30,000 additional persons could make the car purchase if the tax rate were only 5%.  So at 5%, $2,000 Million dollars of vehicle sales occur which generate $100 Million dollars of tax revenue.
But wait!  Haven't we just shown that the government loses $40 Million of tax revenue by lowering the tax rate?  Why of course we have.  But this only considers the effect on receipts of car sales taxes.  Tune in tomorrow for the rest of the story!
Stay Fresh!
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Key Indicators for Thursday, December 9th, 2010
MINT Perceived Target Rate*:  5.25%
Unemployment Rate:  9.8%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,372
M1 Monetary Base:  $1,763,900,000,000
M2 Monetary Base:  $8,707,500,000,000


*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.