Whiting column: Responsible taxation is for right things, right reasons
October 2, 2018
The economics of governmental spending is complex.
Whether it be a governmental entity, formal agency or pseudo-governmental agency, it's common for entities receiving taxpayer funds to justify their expenditures through an economic benefit argument. In general, these arguments are generated through mental exercise and assumption. Actual economic benefits seldom exist, and if they do are small, especially when compared to the taxpayer funds utilized.
Touted economic numbers tend to be generated by the entity themselves or another organization possessing a vested interest via mission or payment. An organization hired to determine economic benefit, had better come up with something, no matter the stretch, or no other entity will hire them.
Economics isn't a pure science, but there are certain principles beyond debate. The applicable principle: The most efficient economic use of money is to keep it in the hands of those that worked to generate it, whether individual or business. They will spend, invest or save it. All are an economic benefit.
In any economic system, money doesn't have intrinsic value. It's only purpose is to facilitate a transaction to meet needs when compared to barter or more barbaric methods of acquisition. Consequently, it's not used for wall decoration or eaten; they use it. When it's not available to be spent an economic detriment results. It's that simple.
Entities argue they spend; a true statement. But they do not have a vested interest to spend efficiently, and the system reduces spendable dollars. There is a bureaucratic cost to receive and spend the money.
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Social Security is an example. A mythical person works from age 25 to 65, averaging $30K, $40K, $50K, $60K each decade. Social Security tax will total $275K. If invested conservatively at 3 percent this becomes $475,900. At 7 percent (average stock market return since 1950) $1,141,077. This pattern of income generates a retirement benefit of $2,227/month. He would need to live to 75 to receive the money put in; 83 to receive what he would have at 3 percent, and 108 at 7 percent.
I am commonly asked what happens to all that money. It's lost in the system's bureaucratic expense. In 2017, Social Security spent $6.5 billion on administration that could have been spent by those who earned the money. The resulting economic benefit is obvious.
The $831 billion Obama stimulus is another example. We aren't debating whether it was necessary but rather was giving it to a few select businesses and government programs the most efficient method. The population in 2010 was 309 million. As an alternative, each person could have been given $2,700. A family of four would have received over $10,000. With individuals spending an additional $831B, the boost to business would have been more significant.
Additionally, $324M was spent administering the stimulus; even more that could have been spent. Almost like a network marketing scheme, $58B was given to state and local governments, which then had to create their own bureaucracy to distribute those funds.
To be an economic boost, a governmental asset or activity must generate new money — a profit. It's possible, but in the majority of cases it will never happen.
For example, "We should build a recreation center; it will be an economic boost." If the new center costs $10M, that $10M can't be spent by taxpayers. The center will never recover the $10M through profits. In fact, most centers lose money each year, requiring a subsidy further reducing the money the taxpayer can spend.
It's often argued that the center or facility will attract out-of-town people, which will bring new money to the community. True statement. But it will be very difficult for it to attract enough new money to create over $10M in profit to balance the taxpayer cost of the facility. If the asset is a $100K baseball field, over time enough new money could be brought in, but even then it's not just $100K, it's generating $100K in profits.
The taxpayer funded pseudo-governmental entities are the same. An example would be a bus company. They can postulate and hypothesize all sorts of economic benefit, but if they don't make a profit it's not possible. The millions spent on employees, bus stops, mechanics, buildings, administration, fuel, employees, let alone a depreciating asset, buses. It all takes money out of the hands of the taxpayer. Riders would all find a way to work without the bus. Tourists aren't coming here to ride the bus. It could be argued that, without the bus system, employers would increase wages in order to attract employees. An economic principle is those receiving the product or service pay for it.
This does not mean there shouldn't be taxes. Our economic system requires spending money on the executive, legislative and judicial branches of government. The world demands a national defense; we must educate our population. There are some government programs we need, but need is the key.
The recreation center can be a tremendous asset to the city and meet a significant need of its citizens, but it must be built because of that, not because it will generate an economic benefit. The bus system is needed because it's the best way to get cars off the road, to reduce pollution, but not because it will generate an economic benefit.
We have a personal responsibility to make sure our taxes are used judiciously. In order to make sound decisions and not be deceived, we have a responsibility to understand the nature of economics and to make sure our taxes are used for the right things, and for the right reason.
Bryan Whiting feels most of our issues are best solved by personal responsibility and an understanding of non-partisan economics rather than by government intervention. He recently retired after 40 years of teaching marketing, entrepreneurship and economics. Comments and column suggestions to: firstname.lastname@example.org
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