I am not about to weigh in on who I think should win the federal election or even whether I’d like to see a majority or a minority. To be honest, I would love to pick and choose among the policies among all the parties – of course, real politics don’t work that way.
But I would like to weigh in on something that really does need to be said, because I think it can work as a bridge between right and left-leaning policies: the role of taxation, and why, in fact, the market is preferable in most cases.
Take this all-too-familiar supply-demand curve:
In this case we have a before-tax supply curve (green), an after-tax supply curve (red) and a demand curve (blue).
Description of deadweight as it pertains to a tax.
As you may (or may not) have learned in a basic economics class, the ‘invisible hand’ will guide the market towards the price and quantity that matches where the demand and supply curves meet (where green meets blue). Let’s say that this location is $10 and 10 gajibazillions units sold for a total of $100 gajibazillion dollars.
Now we add the tax. In this graph, it’s a straight-forward per unit tax, like gas, say at $1 per unit (if we did a percentage tax, like the GST, the space between the two supply curves would get bigger as you moved to the right, but per unit is easier to deal with, so let’s go with that).
When consumers find out that the costs is, in fact, $1 more than the stated cost, they will realize that they are not getting the same amount of product for the higher price (because $1 is going to the government). “Oh no!” many will say, “the product is not worth all that much money. ” They will drop out of the market. Suppliers, responding to the change in demand, will drop their prices slightly so to maximize their profits. Let’s say the new price is $10.75, and the new lower quantity is 9 gajibazillion units. This change in behavior of consumers and suppliers in response to the tax is called a market distortion.
Okay – so now some math. We’ve already discovered that the market volume with no tax is 100 gajibazillion dollars. The market volume after the tax is $9.75 (remember, $1 goes to the government to pay the taxes) times 9 units or $87.75 gajibazillion dollars, for a difference of 12.25 gajibazillion dollars.
Ah – but of course, the government will be absolutely efficient and non-bureaucratic and responsible with our tax dollars, so we are going to get the value of those taxes one way or another right? Sure. Except, they are collecting $1 for each of the 9 gajibazillion units for a grand total of 9 gajibazillion dollars, well short of the $12.25 gajibazillion dollars that was lost in the economy. A grand total of 3.25 gajibazillion is lost – a completely unrecoverable loss in the economy simply by applying the tax - and that’s before we consider anything about the costs of administering the tax, whether that tax gets used effectively or efficiently by the government and so on.
This is why taxes are evil. The flip side, of course, is that there are a number of other things that are more evil than tax burdens. Things like large government deficits, lack of support for the poor, lack of equality, lack of established order and so on.
This should mean that we ought to consider a few things:
- anyone who tells you that they are building the economy by using your tax dollars is lying. Deficits are merely deferred taxes. You can temporarily stall an economic downturn, or you can build certain sectors of the economy, but when push comes to shove, any tax *takes away* from the economy, and never recovers what was taken away.
- given a proportional tax rate (eg. income tax, where the tax rate increases as income increases), the market distortions at the higher pay scales will result in even higher market distortions. This is a pretty solid argument in favor of reducing taxes for those with higher wages, especially if you want to build your economy on a highly skilled labour force. Another solution is to offer a flat tax rate, which has the added benefit of reducing the administrative costs of calculating your taxes every year.
- Unfortunately, this implies an inequitable distribution of funds in the economy. By doing the best possible things for the largest group of people, those at the bottom of the totem pole appear to benefit the least. BUT, the bottom line is that bottom of the totem pole still benefits – just not as much as those at the top.
- Anytime you see a promise about a new government program, it is always at least a little bit wise to wonder if those benefits couldn’t otherwise be provided by, well, um YOU. You earning more money by bringing more value to the consumer contributes to reducing the deficit. While some would argue with me, this applies to public servants as well (assuming that the service cannot otherwise be provided by the market).
- Re: corporate taxes – if you pay taxes when you cash in your mutual funds, do you really think you should be paying taxes *again* when your investment turns a profit? Remember, those corporate taxes are also a tax on your pension.
- We should be getting away from deficits as soon as possible. 2-3 years is more than enough to stall the economic downturn. Now it’s up to the private sector to start turning the wheels.
- Don’t trust party reputations when considering this. Conservative does not always mean conservative. Nor does liberal necessarily mean liberal.
- Yeah, this is all just theory. If you do not believe that people act rationally (they don’t), nor have perfect information (they don’t), you have reason to question all of this.