According to Buechner the most fundamental direct way to reduce the economic rate of growth is to divert productive capacity from adding capacity to producing consumer goods. (Recording) Diverting productive capacity, anything you can do that can redirect productive capacity away from adding capacity to instead producing consumer goods. How can you do that? Hazlitt states the practical way of doing that, which is being used today, is to generate a net increase in demand for consumer goods. (190) In order to achieve this and make it work you need to some how create an additional demand for consumer goods that doesn’t take away from any other consumer goods. A net increase in the demand for consumer goods means additional revenues, funds, and sales flowing into those consumer goods firms; then these firms could turn around and use those monetary flows to buy machines, add factories, and add capacity. These are firms are now in position to compete away the labor, equipment, and other resources away from the firms that are adding capacity. Well how can you generate a net increase in the demand for consumer goods out of what? Hazlitt states this is what happens when government increases spending out of new money. (164) This is when the government spends newly created additions to the money supply. According to Buechner this point depends on recognizing that the government is essentially a consumer. (Recording) Now this is a very controversial point in economics today economists almost like a plague will deny this. For the purposes of the is paper I’m going to insist on it and I’m not going to try and persuade anybody because I think it’s really pretty obvious unless your totally committed to a statist point of view. The government is a consumer there is very little that the government does that can be interpreted as adding to the economies productive capacity. Sometimes the government does build a bridge or a highway, and that is an addition to productive capacity kind of, but your stuck with this problem when the government does it-it costs five times as much, and takes ten times as long as it would have done if done by a private profit making business. So how do you interpret that? Is that really an addition to capacity? I mean I find that very puzzling. In any case it’s marginal. According to Buechner ninety five percent of what the government does is consumption. (Recording) Well that’s one way to redirect productive capacity away from producing capacity to producing consumer goods. Here is another method, phantom goods. Anything that can be done to require and, or generate the production demand for phantom goods. According to Buechner the definition of a phantom good: is a good that makes no objective contribution to human life but is required by law. (Recording) For example: Suppose the census every 10 years required you fill out forms of an approximate book length. Suppose that in the process you were required to make complex calculations required in differential calculus. Suppose you had to assemble and reassemble multi-different kinds of facts. Suppose that it was so complicated that you couldn’t do it; you could imagine that a whole profession would spring up that is was dedicated to nothing but helping you fill out the census. Now imagine you had to do that every year and that’s of course the income tax. That is exactly what the income tax does there are millions of people who make there living helping people with there taxes. They help them file their taxes in the spring of every year, and help them manage their affairs throughout the year. Pollution controls also fall under the heading of phantom goods. Phantom labor has basically the same definition as a phantom good. According to Buechner phantom labor is defined as labor that makes no objective contribution to human life, but is required to comply with laws or get around laws. (Recording) The time, energy, and money that is spent in this economy by people complying with the endless stream of regulations, and controls in an effort to comply, get around, or defeat them it’s inestimable. I’m trying to understand why the growth rate today is half of what it was a hundred years ago; that’s not an insignificant fact. All of this is under the general heading of diverting productive capacity from adding capacity to producing consumer goods.
Now there are two other ways that are less direct, which accomplish that same result. According to Hazlitt one is to reduce total savings because we have seen the role savings has. Anything that can done to discourage saving, reduce saving, or make it impossible for people to save by force will cause them to save less, and this is going to reduce the rate of growth. (183) First reduce the amount that can be saved. How can you reduce the amount that people are able to save? Well just take away some of their money. “Seize some of their income” they’ll save less. (Rand 978) Personal income taxes are ideal for this purpose. First I will address the proportional tax. The proportional income tax is what is known as the flat tax. Proportional tax takes the same percentage of everybody’s income it means that you have a single tax rate. Say 10% so if your income is $10,000 you pay a $1,000. If your income is $100,000 you pay $10,000. Now this is the least unjust income tax. It means that the tax burden increases in proportion to your income. Your income is 10 times as large your tax is 10 times as high $1000 for $10,000 $10,000 for $100,000. On the diagram there are two mutually exclusive scenarios.
Table 8
A and B will demonstrate what happens with the effect of governments taxes. A will demonstrate what happens if households earn and keep a 100 billion; then, B what happens if the government collects a 100 billion with a proportional income tax, and spends it. There is no significance to the shapes, and, or designs of these charts. So over on the left hand side is the government, on the right is financial markets, on the bottom is consumer goods and services, and in the middle is households; that rectangle inside of households represents $100 billion in household income. The two alternatives I want to consider is that (A) households get to keep it, and spend it, or (B) the government takes it and spend it. Now the average saving rate in the United States today is about 5% according to Buechner so across the entire population people save about 5% of their personal income. (Recording) So that means for every $100 dollars income on average people save $5, and that means since I’m taking the same percentage of everybody’s income; that percentage should be reflected in this $100 billion. So I’m going to leave this in the peoples hands-$5 billion will be saved, and $95 billion would be spent on consumption. And that is the way I have indicated here. The $5 billion is saved all the arrows represent flows of money. The $5 billion in saving is going into the financial markets, and $95 billion in household income is spent on consumer goods and services. If instead the government collects the $100 billion via a proportional income tax the whole thing flows to the government $100 billion in taxes, and government spends that $100 billion on consumer goods and services. So the effect here is of this collection of $100 billion by the government is to reduce saving by $5 billion dollars. Reducing saving by $5 billion is a net increase in consumption spending in the economy. Although this is not good I think an argument can be made that the effect on economic growth will be relatively small assuming the tax rate is kept within reasonable limits. Now what people think is reasonable changes over time, but obviously if the government uses a proportional tax to take 90% of peoples income that’s going to be a disaster. If it stays around 20 or 30% which is what people are finding acceptable today. I think best the way to describe this is as follows. According to Buechner what we end up with is a substitution of consumer spending by government for consumer spending by households. (Recording) Essentially that is what this tax does. Instead of the people buying the consumer goods they want there money is used to buy consumer goods the government wants, and the net affect on the allocation of capacity between adding capacity and consumer goods I think would be relatively minor.
Now looking at a progressive tax it’s worse.
Table 9
Now everything here is the same except the saving. I’m now assuming the $100 billion is left in household’s hands this saving is $10 billion. Now why is it higher? This is because a progressive tax takes a larger percentage of higher incomes. A progressive tax going back to the example I was using before maybe the rate is 10% for a $10,000 so you pay a $1000 if your income $10,000, but if you’re making a $100,000 your rate maybe is 40% so you pay $40,000 in taxes. Your income is 10 times higher, but your tax burden is 40 times higher. Now this system is an outrage on its face, and according to Rand it has never been justified in anything short of total egalitarian level down and destroy the rich. (622) The effect is also bad for economic growth because a progressive tax takes more money from people with higher incomes. People with higher incomes save more, and that means that the amount of money that is diverted from savings to consumption through the government is going to be greater with a progressive tax. That’s what this represents. Whatever the numbers the progressive tax is worse for saving than a proportional tax. I should make it clear I made this number up, I don’t know what the right number would be here, I don’t think anybody knows, I don’t know how it would be possible to find out. “It would be impossible for even the cleverest statistician to know”(Hazlitt 78) All I can say is that clearly a progressive tax is worse for economic growth than a proportional tax.
The corporate profits tax.
Table 10
The corporate tax structure in the United States is more complicated than the individual tax structure. It goes up to from 15% to 39% as a top bracket; then, after that it goes down again to 35% on any profits over approximately 18 million dollars. Now corporate profits are divided into two parts. One part is retained earnings and the other part is dividends. So those are the two things a corporation can do with its profits. The corporation can either retain the profit, or reinvest in the business or it can pay all or a portion of the profit out as dividend to its stockholders. If the corporation pays does decide to pay out profits as a dividend to its stockholders those stockholders are typically among the more wealthy individuals of the population; they’ll save some portion of the dividends they receive. I’m assuming the division is fifty-fifty so on a $100 billion in corporate profits $50 billion is retained earnings, and $50 billion goes to dividends. Of the $50 billion in dividends $10 billion is saved $40 billion is spend on consumption. So the total savings here is the $50 billion in retained earnings that the corporation reinvests in its business plus the $10 billion in savings that the stockholders would save. So $10 billion plus $50 billion equals $60 billion that will go into the financial markets as long as it is not collected in taxes. The remaining $40 billion in consumption spending by the stockholders would go into the consumer goods market. Now if the government collects it in taxes by means of a corporate tax of course it take the whole thing and spends all it on consumers goods and services. I think this a significantly more destructive tax even than the progressive income tax for economic growth because these retained earnings are the most powerful source of potential increases in capacity. These are funds that the business keeps, and can put directly back into the business. Actually this use to be worse than it is today back in 1960 23% of the federal governments revenues came from the corporate profits tax; today it’s down around 9%. According to the United States Department of Treasury in 1960 the corporate rate was 48% and for all practical purposes that’s like 50% percent of all corporate taxes went to the government; today it averages something like 35% percent. (Online) That’s a very bad tax for economic growth it’s bad for a long list for other reasons not the least of which, no body knows who pays this tax, nobody knows where the burden of this tax falls. Now all this was under the heading of reducing the amount that people are able to save.
It also very helpful if you can reduce the amount they want to save that is if you want to reduce economic growth. How can you reduce the amount they want to save? Well why do people save? Or why did they save? In the 19th century the primary motive for saving by people up until the 1930’s the reason people saved fundamentally was for there retirement for there old age, so they would not be destitute in there old age, so they wouldn’t be a burden on there children they saved. They don’t do that today, or they certainly don’t do it the way they did 100 years ago. Why not? Well today the government is saving for you. That system is called social security according to Franklin D. Roosevelt the government will provide for your old age you don’t need to worry about it anymore. (Online) Now if in fact the government were saving it wouldn’t be so bad, but the governing is not saving; the social security system is a simple “transfer system from the young to the old” there is no saving going on. (Hazlitt 53) This totally undermines the fundamental personal motive that people have to save in the absence of a welfare state. What is the second motive for saving? The secondary most important personal motive people would have to save used to be called saving for a rainy day. Saving for hard times, saving in case of loss of employment, saving for in case somebody gets sick, saving for a rainy day; I don’t know whether young people are even familiar with that expression anymore. Well what happens on a rainy day? Well there is a safety net a whole welfare system of constructing a safety net. On a rainy day you just fall into the net you don’t need to provide for yourself anymore the government will pick it up. Again the personal motive is destroyed or at least is seriously undermined by the whole welfare system, and in the case of the safety net there is not even the pretence of safety. Reduce the amount people want to save – inflation is great for this. Inflation reduces the real return on savings. The reward you get for savings is the interest that you are paid if you invest a $1000 dollars at 5% interest at the end of the year you will have $1050; that $50 dollars is your reward for saving, for making those funds available for productive purposes. What if the inflation rate is also 5%? If the inflation rate is 5%; then, at the end of that year you will need $1050 to buy what you could have of bought at the beginning of the year with a $1000. So the 5% interest return in real terms is 0% you need a $1050 to purchase the same amount you could buy with a $1000 at the beginning of the year. If the interest rate and the savings rate are the same percentage you are making no interest. Without real interest your money is just retaining its value. What happens if the inflation rate goes above the interest rate? You’ll end up having negative interest, therefore the value of your savings are shrinking over time-you can buy less. Suppose inflation rate is 7% is, and the interest return on your savings is 5%. That means at the end of the year you need $1070 to buy the same things you could have bought with a $1000 at the beginning of the year, but the with the interest return you have $1050 your $20 dollars short you can buy less with the additional money. This is depressing. From roughly 1978 to 1981 when the inflation rate was the highest in this country there was three years of almost continuous negative interest where everybody’s saving became less and less valuable over time. According to Buechner this lead to a near permanent decline in the savings rate in the United States before that period the saving rate in the United States was around 7 or 8% which, is half of what it was in Japan, but at the end of the period around 1982 the saving rate was around 3%. (Recording) It takes people a while to learn but eventually they get the idea you know this is not a good deal. Now it’s crept up since then very slowly according to Angel were up around 5%, which is still a pathetic savings rate. (Online)
Even better you combine inflation with a tax on your interest income. You know a tax which, doesn’t recognize that most of that interest income is necessary to just to stay even, and to make up for the inflation rate. That’s what the government does for the people. I used to live in New York City, and I can personally testify the total tax rate if you add up the federal rate of almost 40%, and the income tax rate of the city, and the state tax it’s over 50%. In New York City the income tax rate over 50%! Suppose that your making an interest return of 5% on your savings. The government takes more than half of that. Lets say they take only half that reduces your interest return to 2.5% the according to Angel consumer prices for the last half year have been running around 3% (Online) so you got a 2.5% percent rate of return after you pay taxes. The prices you’re paying are increasing at a 3% rate. What is your real interest return? Minus .5% it’s a negative real return. Now I think this is worth doing everybody should do this. When you take account of the inflation rate, and taxes you pay the odds are pretty good that you will find yourself very close if not in the negative range. You may be asking yourself why should I save. The point of this is not that you shouldn’t save; there are reasons to save even if the value of your saving is slowly shrinking over time. You can still increase you wealth by savings, but talk about discouraging you get nothing out of the interest.