Whiting column: Tax decisions are also an economic choice
Any tax or fee, collected in any manner, for whatever purpose, is detrimental to the economy. Governmental entities and institutions must recover their costs, and many of their services are considered essential, creating a complex economic dichotomy.
No one wants increased taxes, but we desire more services. No one wants more income deductions, but we desire a paycheck which is facilitated by a robust economy.
Email requests, regarding the relationship between taxes and the economy, has precipitated today’s discussion. A local proposal increasing sales taxes for street repair, a statewide Family Leave Act proposal increasing payroll taxes, and a national move to increase federal income taxes provide additional relevance.
Remember economics is the movement of money. It tends to go up or down at a geometric rate (2,4,8,16) as opposed to an arithmetic rate (1,2,3,4). Taxes reduce dollars available to be spent, reduce the number of transactions and remove money from the area in which it was created, all of which reduce employment causing more of the same.
It is argued that governments will spend the dollars anyway, instead of individuals or business. True statement. Governments and other tax-supported institutions never have trouble spending. A problem is governments spend in large chunks consequently decreasing the number of transactions, reducing the number of different individuals/businesses able to re-spend the money or use it to create new money through profits.
Additionally, the governmental bureaucracy required to administer the taxes reduces spendable dollars.
Individuals tend to spend locally; governments not so much. When money is spent outside the area in which it was developed, the economic multipliers are lost.
Some argue governments assessing taxes is the same as business borrowing money. Not true. Business borrows to acquire an asset (land, building, equipment, inventory) to generate profit; generating money. When government buys the same assets they aren’t generating a profit and are reducing tax revenue by taking property off the tax roll. Further, a business repaying the money returns it to the economy.
A business spending and creating new money through profit, facilitates a larger economic multiplier — a 1:3 effect. Governments don’t make a profit, generating a 1:1 effect with some economists feeling it is 1:.75 considering the bureaucratic expense.
Does that mean government shouldn’t spend or buy? Of course not. It isn’t income producing, but it may facilitate spending within the community: ball park hosting tournaments, downtown attractions drawing tourists.
Economic ramifications are often not considered in decision making. The purchase of an asset necessitates future spending for maintenance, repair and subsidies covering the money lost in the daily operation of the asset.
This doesn’t mean the asset or activity shouldn’t be acquired. It provides something the people feel is needed whether it be basic, such as streets, or an amenity, such as a rec center.
Neither will produce profit, and the rec center will produce negative cash flows requiring a subsidy. But if the community feels the need justifies the cost then the taxes should be collected and spent in that regard.
The argument that current tax rates will produce additional revenue due to an increasing population may be true in the long run, but economics is geometric. When population increases, the need for services and assets increases. These services — police, fire, education, housing, roads, utilities — have a high up-front cost.
It’s irrelevant whether the population increase occurs because of birth rate, new jobs requiring new residents or immigration. The need precedes increased tax revenue.
The property tax valuation is the same. The increased sales or income tax revenue lags years behind the needs of increased population.
Having taxes paid by others can be a strategy. Nationally, that’s a foreign owned business paying income taxes. Locally, that’s tourists paying sales taxes.
Another strategy is realigning spending. In most governments or institutions, the largest expenditure is people. An example: the Denver teachers strike. Salaries were raised 10 percent. To pay for it, 150 non-classroom personnel were cut.
Another route is to increase fees elsewhere, but in practicality that’s still taxes. More effective is selling an asset, land or building. This produces cash and puts the property back on the tax rolls, generating additional perpetual income.
Another strategy for services that are not essential is the nonprofit model — greater reliance on philanthropy, but who determines what is essential. Everything is considered essential by someone.
A government could have its services, amenities pay for themselves, dividing the cost of operation of the swimming pool, or the bus system, among those using the service. This is difficult, because that cost is such most can’t afford the necessitated price. A lower price means an operational loss. If profit was possible a business would supply it.
It is our personal responsibility to understand the complex relationship between taxes and the economy, facilitating an informed decision balancing what we feel we need with what we are willing to pay.
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. His column appears monthly in the Post Independent. Comments and column suggestions to: email@example.com.
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