13 May 2010

A counterintuitive inverse relationship

Today, I'm going to explain why lower taxes, in addition to encouraging economic growth and taking a load off the mind of the Productive Class, actually increase tax revenue.

"WTF? I knew this guy was nuts!!"

Bear with me, and I shall demonstrate, using round numbers and simple concepts.

Let's say an entrepeneur wants to go into business making and selling stuffed purple penguins. Let us further assume that the penguins' costs (including manufacture, distribution, warehousing and so on) total $1 per penguin. And finally, we'll say that the Penguin Man wants to make a profit of an additional $1 per penguin.

The word "penguin" looks really strange when you type it a lot.

Now, we add taxes. Let's say we have an Obamanoid administration who never met a tax it didn't like. They tax the retail space in the stores that carry the penguins. They tax the fuel, wages, parts and road use of the trucks that deliver the penguins. They tax the stuffed-critter-making-machine company. All these taxes add up to an additional cost of $5 per penguin. In addition, they slap on a VAT of an additional $5 per penguin.

Now that little purple guy costs twelve bucks. Very few people will shell out that kind of money no matter how cute he is. So only 2000 units per year are sold. What happens?

The government rakes in $20,000 in tax receipts. The Penguin Man makes $2000 and decides he'd be better off on welfare. Another business dies, and all the businesses that Penguin Man did business with, suffer the loss of a customer.

Let's say that the administration, after mobs descend on the Capitol with torches and pitchforks, agree to repeal the VAT. Business taxes remain, however, but now the total tax rate on the penguins is halved.

The stuffed penguins now cost seven dollars. Fairly high for a small stuffed critter, but more people will be willing to pay the price. Sales increase to 50,000 per year. Now, what's the result?

The government gets $250,000 in taxes. Over ten times what they got when the tax was twice as much. Penguin Man makes $50,000 and decides to stay in business. He's not raking it in, but it's a decent amount of money and he likes selling penguins.

Finally, elections are held and we get an administration which does not have its head embedded firmly in its ass. They scrap all business taxes and income taxes, and establish a very small VAT of $0.50 per penguin.

People will buy those purple fluffballs all day long for $2.50. Sales increase to 2,000,000 per year. Let's do the math...

Government tax receipts: $1,000,000. Four times as much as when the tax was tenfold. Fifty times as much as when the tax was twenty-fold.

Meanwhile, Penguin Man has made two million dollars. Selling penguins has become so profitable, he's thinking of branching out into stuffed walruses, stuffed condors, stuffed unicorns that crap Skittles...the possibilities are endless. The truckers who deliver his penguins are getting more loads. The stores are getting more of a cut. He has to hire more help for his business, and so do the people at the stuffed-critter-machine company, since they've just gotten a call from Penguin Man that made them very happy.

Behold all the people that are making more money, and therefore spending and investing more money. Behold all the businesses that are hiring people, turning them from tax consumers into tax payers.* Behold the power of capitalism kicking ass, taking names, and providing more money for the country than was ever possible under confiscatory taxation.

It seems like a contradiction, but contradictions don't exist. You simply have to look at the Big Picture.

* Even with the income tax repealed, there's still the small, reasonable VAT. People still have to eat, fuel their car, have electricity, internet and all the rest.

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