Do We Look that Stupid?

We break from our regularly scheduled pastoral musings for an economics lesson.  I have no agenda except to vent my frustration of being considered an idiot by our political elite.  “They” have made our electoral process a circus and forced us to buy tickets to it.  I’m afraid the accountant I’d long buried in my soul has resurrected this election season.  I can’t take it anymore!  I hereby remove my clerical collar and don my little green banker’s hat for this post.

The two main candidates throw around statistics and numbers that are irrelevant to the average voter.  They speak in macro-economical terms so as to distract from the micro-economical affects.  For example, one candidate blames the other for proposing $4 billion in tax breaks for “Big Oil.”  Whether that’s actually true or not doesn’t matter.  It just sounds scary and assumes we won’t investigate further.  In the end, it’s simple rhetorical sensationalizing.

One candidate blames the other for voting a certain way so many times in Congress.  This is disingenuous.  For example, assume you had to vote to deny pedophiles from teaching elementary school.  But proposed in the same legislation was government-sponsored free interstate abortion services.  You would vote yes to deny teaching opportunities to pedophiles, but no to the free abortion services.  No matter which way you vote you’ll be accused of supporting either pedophile teachers or free abortions.  Obviously, not every piece of legislation is that dramatic but it is reflective of the manipulative affect of earmarks and pork barrel projects.  So when one candidate accuses the other being for or against certain things, we must know the details of the legislation.  We’re not that stupid.

Now, one of the main candidates has promised to raise taxes on the top 5% of corporate earners in order to provide relief for 95% of Americans.  (Please know that I didn’t vote for his main opponent, either.)  Those are abstract numbers that have no meaning to voters.  It’s just rhetorical flair.  He claims those making less than $250,000 will see no increase in taxes.  We’re not that stupid.  Economics 101 is enough to explain why this plan is a smoke screen to garner votes.  Corporations don’t pay taxes . . . people do!  Let’s break this down into simple numbers we can understand; follow the simple logic:

Assume I manufacture and sell widgets.  It costs me $.50 to make one widget that I then sell you for $1.  I’ve made a $.50 profit on which I pay 10% in taxes, or $.05.  I’ve netted after taxes $.45.

Now, assume Congress raises the tax rate to 20%.  It now costs me more to manufacture and sell my widget.  Do you think I’m going to eat that cost out of the goodness of my heart?  Of course not!  I’m going to sell my widget for $1.12.  Why?  The taxes on my suppliers has gone up so it now it costs them more and they pass that cost on to me.  It now costs me $.55 to make a widget.  So I sell you a widget for $1.12 which makes for a profit of $.57.  I must now pay 20% taxes, netting after taxes $.45.  So, has the corporation really paid more taxes?  No!  They’ve still taken home the same amount.  The consumer has paid for it via higher prices.

This 95 percentile who drooled over a government check must now pay (in my scenario) 12% more in goods and services.  The government has forced me to raise my prices rather than the market.  Essentially, by tax hikes the government creates price floors (companies won’t sell goods at a loss) that ultimately hurt the consumer.  Higher taxes on “the rich” actually becomes an oppressive tax on the poor.

So, should this candidate get elected and he’s able to follow through on his promise then expect the following logical results:

1.  Inflation.  Higher corporate taxes inevitably means goods and services will cost more.  Companies will simply pass along their higher costs to the consumer.

2.  The more expensive goods and services get the more consumers will cut down and avoid paying the higher prices.  They stop buying as much.  If they stop buying as much then companies stop making as much (they are for-profit organizations!).  When companies stop making as much then they lay folks off and stop hiring.  People without jobs don’t buy as much and the downward cycle spirals further downward.

3.  If I plan to make more than $250,000 next year and suffer a promised tax hike then there is no motivation for producing more goods and services.  It will cost me more to make an extra $1,000 than if I’d not made it at all.  For example, if I make $249,999 I pay no taxes.  If I make $250,001 I pay 10% in taxes.  I will pocket more money by making less of it.  So I cut back on my production.

4.  If my capital gains rate is going up next year then I will pocket less money in 2009 than in 2008 by selling any appreciated property (stocks, real estate, etc.).  Knowing this higher rate may last 4 or 8 years, I will sell at a time that nets me more money.  If the tax-raising candidate is elected November 4 then expect a massive sell-off before January.  That will drive the economy further downward.  Then capital activity will drastically decrease in the next 4 to 8 years.  In fact, the stock market’s current roller coaster ride is evidence that folks are trying to make last-minute money while the capital gains rates are lower.

This is not a partisan issue.  It’s a simple economic one.  Lower taxes motivates companies to make more money which leads to more capital investments, which means hiring more people, which means creating more consumers (not co-dependent borrowers!).  The market’s “invisible hand” will determine how much is made by controlling whether they price themselves out of the market or not.  The more money companies make the more taxes they collectively pay, and consumers pay lower competitive prices.  That’s spreading the wealth.

Frankly, neither main candidate offers the necessary, radically market-driven strategy that would really help.  And there are more important reasons to vote for any particular candidate. But don’t be duped by economic banalities.  If you vote, do so with eyes wide open and hands on your wallet.

8 thoughts on “Do We Look that Stupid?

  1. Good thinking is always good no matter if you are wearing your “clerical collar” or you banker’s hat (or your “Big Six” bowtie!). If Wayne Grudem can take the time to write a book on business (which I applaud) you can take the time to write more posts on economic theory and how it applies to our lives. I must take issue with one thing you said, however. The political elites do consider the general public idiots for good reasons. Many people are too lazy to think through issues and so self-centered that they buy into any thing that sounds like it will benefit them personally and immediately. This is a huge sin issue for the church and this is why you should keep both hat and collar (but not that bowtie) at hand.

    Blessings brother!

  2. First of all, “Bowtie Friday” at Arthur Andersen was the greatest contribution I ever made to public accounting. Had more colleagues embraced the spirit of it I doubt AA would’ve ever suffered the Enron guillotine. Those big shots with their fancy Italian neckties got too big for their ascots. The bowtie grounds a man in a classic age and understanding of hard work and honest living.

    I’m afraid your point is well taken about average voters. We’re driven by greed that would sacrifice a future $2 for the quick buck now. My how that speaks to my own progressive sanctification! “Glory now, suffering later” is our modern Christian worldview.

  3. I guess by even saying “Big Six” I show that I am a decade or two behind the contemporary accounting firm scene.

  4. I have to very much agree with both you and Scott V on the way politics is run. They do think we (US Citizens) are idiots, because much of the time we (US Citizens) behave like such. Witness the recent economic meltdown. Too many people with too much debt. Too much government “action” creating too much debt. Too many corporations with too much debt. A line from a movie comes to mind “your ego is writing checks your body can’t cash.”

    People always look to leaders to lead them out of the darkness. One pit falls of democracy though, is we get to choose the leaders – and we seem to choose those who will lead us “down” the easy path (Matt 7:13-14) instead of “up” the narrow and difficult path.

    Sometimes to make an effective change, we have to see things for what they are. America is not really a democracy, and that may be for better or for worse. And the President does not call the shots, like a king would. Our government is a mishmash of a republic, democractic, and oligarchic systems. (Through in corporations, which are mini-governments in themselves, and which were not around when the Constitution was written) and you have a real mess for an average citizen to try to learn. To make it worse, the real power brokers operating behind the scenes, are the political parties. These operate largely without scrutiny or oversight.

    And yet, because we can vote, our voice can make a (small) difference. What is more, if we vote on the smaller elections, we make a perportionally larger difference. It is more important to be heard by your city council, your school board, and your representative than it is to vote for a president. As a matter of fact, I could argue quite well that your presidential vote does not matter at all, but your vote on the local level does.

    Which means that, if we are to make a difference, we must do some homework. Many people do not even know who their representative is. He is, of course, that guy who sent you that junk mail you through away last week. 🙂 The harder part is who is running against him (or her). It may be fortunate in most districts, that we vote for these people on off years and sometimes in May, as that will filter out those who really are not interested. If only 10% of the people vote, that makes my vote count ten times as much.

    Looking up at what I wrote, I seem to have gone on a bit of a rant, but politics is a hobby of mine – and even if I see the hope for this country fading, I enjoy discussing the subject.

  5. Pastor Maxwell: I enjoy your blog. I will note one error above. On point 3 you state that earning more than $250,000 would cost you more than earning $249,999, presuming that everything below $250,000 would not be subject to taxation.

    But, remember, the United States uses marginal tax rates. With marginal tax rates, the 10% rate would only apply to the income earned that was in excess of $250,000. This concept is more fully explained here:

  6. Thanks, Vaughn, for your kind consideration and clarification about marginal tax rates. My scenario was too simplistic indeed, which is why I’m a better preacher than accountant (which actually isn’t saying much!).

    However, I wanted to emphasize the impact higher taxes have on increasing disincentives to producing/earning more. The amount of time/energy/investment it takes to produce more eventually becomes counterproductive to the return. Higher taxes means It will cost me more time/energy/investment to make my 251st $1000 than the 1st $1000. I’m less inclined to earn the 252nd (taxed higher) than the 2nd (taxed lower).

    All that to say . . . vote for the Fair Tax!

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