Friday, December 10, 2010

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

12/10/2010 Santa Cruz, Bolivia – Pop in your mints…
We are arriving in Bolivia today for what will be a wonderful holiday with our in-laws who live in Cochabamba.  In the coming weeks these chronicles will come to you from the southern hemisphere.  Stay tuned.  For today we must end the suspense which we left off yesterday, if nothing else for our own benefit!  So where were we?  Ah yes, we left off yesterday by making an assertion and then seemingly disproving our own hypothesis.  What is going on?  We must rectify this immediately!  So we head back to the car lot where we revisit our 100,000 prospective car buyers. 
You recall, don't you, dear taxpayer, the 100,000 persons trying to determine whether or not to purchase a certain car that costs $20,000 facing a 10% sales tax if they were to make the purchase?  Do you recall that 30,000 of those who wanted a car could make the purchase if only the tax were 5% instead of the current 10% and are forced to delay their purchases?  Do you recall that the government would lose $40 Million of tax revenue by lowering the tax rate to 5%?  Do you recall the most famous reindeer of all?
Rudolph!
Today we will prove that lowering taxes can and generally does increase overall tax revenues.  In our hypothetical situation yesterday, we only considered the effect on receipts of car sales taxes and lamented our "lost" $40 Million of tax revenue that the government could otherwise promptly squander on their beloved bank bailouts, to use a recent example. 
Now for the exciting part, we introduce the multiplying effect of unrestrained commerce!
What the above example fails to contemplate is the economic activity created by 30,000 additional vehicles on the road as well as the $40 Million that the consumers can now employ for other purposes.  While these positive effects are hard to quantify, it should be clear that by foregoing $40 Million worth of tax revenue, the government has removed a yoke that was holding back a decent amount of economic activity, which could possibly be taxed in a different manner, that was simply restrained from taking place by a 10% sales tax on cars being in place.
And it doesn't stop there!  For illustrative purposes, we used 30 as the percentage of persons eager to purchase a car who were prohibited from doing so by the 10% sales tax rate.  It should be obvious to anyone who owns a calculator that, in our example, if a 50% decrease in the tax rate means a double (a 100% increase) the sales (from, say 50,000 car sales to 100,000 car sales), there is no net loss to the government in tax revenue and what remains to be counted is the positive effects of the 50,000 more cars being produced, sold, maintained, etc. as well as the $100 Million in foregone taxes that consumers and producers are now free to use for their own designated purposes.
Can you see now how a low general tax rate could benefit society in ways we cannot yet imagine?  The only restraint to doing so is the government's own ambitions.  Or more concisely put, how much the government wishes to restrain economic activity.  All government talk of "stimulus" is pointless and empty unless it involves lowering taxes, as Obama and the GOP appear to be prepared to do.
When it comes to government activity, less is more!
Stay Fresh!
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Key Indicators for Friday, December 10th, 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.