The Truth about Taxes

• Nobody likes being taxed.
• Some level of taxation is necessary:
  • E.g. Articles of Confederation Cite accessed 10/31/2024
• Any activity that is taxed will be suppressed:
  • E.g. Tobacco.
  • This effect is most profound for nice-to-have but not essential products (that have an "elastic demand curve"), but relatively small for essential products (that have an "inelastic demand curve"). Cite accessed 10/31/2024
• Any activity that is not taxed given a tax credit will be enhanced.
• Public policy (i.e. Congress) dictates which activities will be taxed or untaxed given a tax credit.
• Tax policy determines the prosperity of a nation.
• Who you vote for matters!

• Sales tax - impacts low income people more (is "regressive").
• Use taxes (gas, toll-roads, etc.) Cite accessed 11/01/2024
• Value-added tax Cite accessed 11/01/2024
• Tariffs
• Income tax - impacts high income people more (is "progressive"). In the United States for 2025, the marginal tax rate (after deductions, credits, and adjustments are made) ranges from 10% for incomes of $11,925 or less up to 37% for incomes greater than $626,350. Cite accessed 10/31/2024 In 2021, individual taxpayers with more than the median income (upper middle class and above) paid 97.7% of all federal individual income taxes, while those below the median income (lower middle class and below) only paid 2.3%. Cite accessed 10/31/2024
• Property tax
• Inflation - A hidden tax; see below).
• Capital gains - A tax applied to the "profit" from selling an asset held 1 year or more (e.g. a home, stocks, gold, a factory, etc.) for more than the original purchase price of that asset. Unfortunately, this "profit" is NOT adjusted for inflation; see below. Cite accessed 10/31/2024
• Unrealized capital gains tax - Proposed by Vice President Harris; see below). This tax suffers from all of the same issues as regular capital gains tax, plus it reduces investment capital to expand an enterprise (reducing potential growth economicactivity, jobs, and the Gross Domestic Product (GDP). In addition it's rules are complex and introduce significant new accounting and enforcement costs. Cite accessed 10/31/2024
• Inheritance tax
• Regulations (a form of fascism) - According to Wikipedia [trust but verify], "In general, fascist governments exercised control over private property but they did not nationalize it ... big business developed an increasingly close partnership with the Italian Fascist and German Nazi governments after they took power. Business leaders supported the government's political and military goals. In exchange, the government pursued economic policies that maximized the profits of its business allies." Cite accessed 11/01/2024

• Based on economic theories of John Maynard Keynes (1883-1946).
• American workers are paid for producing goods and services to be sold (they also pay income tax).
• These workers spend their money in their community, thus providing jobs for additional American workers, who also spend their money in their community (and also pay income tax).
• The cycle is broken when foreign goods are purchased, taxes siphon off the money, the money is used to repay debts, or is put into savings.
• Cite accessed 11/01/2024 Cite accessed 11/01/2024

Tariffs

• Discourages purchase of foreign-made goods (import tax raises cost and reduces demand) that promote economic activity in foreign countries (instead of our own).
• Promotes purchase of domestic goods and promotes domestic economic activity (and grows jobs in the USA).
• Positively affects the domestic economic multiplier effect (and grows jobs in the USA).
• Allows income tax to be reduced without reduced tax revenue,
• Promotes balanced trade. Cite accessed 11/01/2024 Just as a balanced household budget is essential for economic security, so is balanced international trade. In 2023 the USA suffered a $386 Billion trade deficit with China, a geopolitical opponent that is using this money to build their military against the USA and our allies (Australia, Taiwan, Japan, South Korea, Philippines, etc.) and also to buy farmland in the USA. Cite accessed 11/01/2024 In effect, the USA is losing a trade war with China.

Income Tax

• Discourages the domestic economic activity of both workers and the corporations who employ them.
• Negatively affects the domestic economic multiplier effect.
• Extreme example: The Plymouth (Mayflower) Colony (Gov. William Bradford). See in particular pages [162] to [164] Cite accessed 10/31/2024

• Increasing cost of goods and services.
• Caused by when the demand for goods and services exceeds supply.
• Drives tax increases due to:
  • Capital gains
  • Unrealized capital gains
  • Tax bracket creep
  • Sales tax

Can fix by:

• Decreasing demand
• Increasing supply

Don't work:

• Price controls (decrease supply)
• Government entitlements (increases demand)

• Demand-side Economics (Keynes, "Bidenomics", Harris) Cite accessed 11/02/2024
• Raising interest rates:
  • Risks recession or depression.
  • Reduces economic activity (jobs).
  • Risks stagflation.
• Increasing taxes on consumers:
  • Reduces economic activity (jobs).
• Repatriating uninvited immigrants:
  • E.g. to reduce housing shortage.
• Reducing government spending:
  • Easier said than done.

• Supply-side Economics ("Reganomics", Trump). Cite accessed 11/02/2024
• Reduce regulations:
  • Reduces cost of making goods and services.
  • Increases domestic productivity.
• Increase supply of raw materials:
  • Especially energy.
• Reduce taxes on domestic producers:
  • Incentivizes domestic production.
• Critics refer to Supply-side Economics as "Trickle Down Economics" while supporters point out that "A rising tide raises all boats." Cite accessed 11/02/2024

• No magic silver bullet:
  • Need to balance more than approach. Most problems are multi-factorial and need a multi-factorial solution.
  • Need a silver shotgun shell [Dr. Dale Bredesen].
• The 2024 election gives an opportunity to reflect on the relative merits of Supply-side versus Demand-side economics (Trump versus Biden/Harris). One economic indicator of the success of the two administrations is the "Misery Index", which is calculated by adding the average unemployment rate to the average inflation rate. Trump had a Misery Index of 6.91 while Biden/Harris has a Misery Index of 9.26. Cite accessed 11/02/2024 How do you feel? Were you better off under Trump or Biden/Harris?
• In order to avoid trade wars, tariffs should not be applied to allies unless we have a significant trade deficit with them, and in no case more than necessary to balance trade with them.
• Tariffs are most appropriate when applied to our geopolitical adversaries and countries engaging in predatory trade practices and theft of intellectual property (e.g. China), with which we are already losing a de facto trade war.
• Winners and Losers:
  • Some people benefit from current government policies and will fight change.
  • We need to balance approaches to avoid unfairly burdening vulnerable populations. For example, some of the revenues generated by tariffs should be used to bolster entitlement programs that are negatively impacted by cost increases caused by the tariffs.
• Not so Fast - Do No Harm:
  • Rapid changes can be disruptive.
  • A sudden increase in tariffs on a product that we have no alternate supplier for can cause serious supply disruption. A slower ramp-up in tariffs gives time to develop domestic producers. The key is commitment to unwavering increases until the required domestic supply can come completely on-line. On the other hand, a rapid increase in tariffs on Chinese-made electric vehicles would not be disruptive, due to many alternative suppliers and low current market penetration in the US of Chinese EVs.
• Tax Reform Act of 1986 caused real-estate crash. Cite accessed 11/01/2024
  • Another example of rapid change disrupting businesses that had long term planning and financial commitments based on the status quo.
  • Address unexpected consequences.
• Don't over-correct.
  • Fordney-McCumber Tariff Act (1922) has been suggested to have caused the market crash in 1929. But note that in 1922 the US already had a positive trade balance of $997 million. Cite accessed 11/01/2024 Cite accessed 11/01/2024 The Smoot-Hawley Tariff Act of 1930 has also been suggested to have contributed to prolonging the Great Depression. However, some commentators suggest that these tariffs actually had minimal effect on the US economy, because "international trade was then a relatively minor part of the US economy." Cite accessed 11/01/2024

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