As the old saying goes, there are only two things for sure, death and taxes. It’s easy to understand the first: you’re born, you get old, and you die. It’s sad but true. The second is a little harder to understand. I mean, why are taxes inevitable?
We can begin by looking at the everyday household budget of the average family. Hey, I’ve raised three kids through braces and the whole thing so I can grasp this part. Each family has to (well, OK, should) have a budget. The budget is not that hard to understand. It has two columns, income and expenses. The hope of all families is that the income column is always greater than the expense column. If it is then that family can cover all of its expenses and actually have a little extra money left over to put away for a rainy day, or say braces, college, etc. Once this family creates its budget and, over time, finds that it is holding consistent, then it can begin to plan what the future will look like, bigger house, bigger car, etc. On the other side of this coin is the family whose expenses are greater than their income. This can happen for a number of reasons. This family didn’t create a budget, or doesn’t know how to. It could be due to a lack of real income growth potential (there is no place else to get extra income). It could be due to a lack of education limiting career advancement opportunities. It can be from living in an area of the country that is suffering from an economic crisis, such as Detroit or Flint, Michigan. And yes, it may be that there is just a lack of initiative to do better. There are some who believe that children raised in the poor ghettos of America are predisposed to failure because they have no other good or positive example to inspire them. For whatever the reason, this family is not able to look to the future with any degree of certainty and so is not able to plan for the future.
Now go back to the above examples and everywhere you see the word income, replace it with the word taxes. Well, the government (at all levels from city to federal) is in the same boat as those families. All governments, since the first time a group of people decided to settle down and form a village, have had to have some source of income to function. At the time, that income may have been in chickens but it was nonetheless a source of revenue. In every instance, that income has been a tax in one word or another or one form or another.
Everyone I know has the expectation that their local government is going to take care of their infrastructure needs. For example, if you have a fire, you have this expectation that you can just lift the phone, dial 911 and someone will come put the fire out for you, treat your injuries or transport you to some place that can, etc. Everybody hates paying taxes but they still want the fire department, police department, the 911 dispatchers, streetlights, street repairs, safe, high quality schools, etc. Well, the bottom line is that you can’t have it both ways. You either pay the taxes or decide what you are willing to do without. You read about this stuff every day. Whole cities that have had to lay off their entire police and/or fire departments, the city in New Jersey that just announced that it would have to layoff over 400 city workers, including police and fire fighters. How many police officers and/or firefighters could your city lose and still be secure? What about teachers or waste water treatment workers, etc.
That leads us back to that first village. They were the first ones who had to think about economics. You know income and expenses. From this simple beginning grew the huge, contentious study of economics. There are people who spend their entire lives in the study of and practice of economics. We do not need to go that deep to look at economic theory as it relates to taxes. It has two well-known strategies. You are probably most familiar with the terms “Trickle-Up/Trickle-Down”. Trickle-Up policy is most often associated with the Democrats, while Trickle-Down with the Republicans but that is an over simplification of a very complex and contentious issue. There are a few schools of thought regarding economic theory and each has its own heroes. And you can be sure that none will admit any fault in their theory. It is always the “other” person that is wrong or misguided. They even have places like Chicago or Austrian.
Trickle-Down economics is actually a term associated with “supply-side” economics that is most associated with Milton Friedman (one of the heroes/Chicago). The simple explanation of “supply-side” economics state that goods create their own demand. In other words, if I manufacture a product, people will buy it. Using this over simplification of a very complex subject, it follows that to facilitate this manufacture; the government should remove all barriers to manufacturing and provide tax incentives, i.e. lower marginal tax rates to business. Some of the barriers they see are things like environmental laws, safety laws, and so on. With that done the business will increase its manufacture of that product, requiring more workers and capital investments (buildings, equipment, inventory, etc.). The result will be more people working (either producing the product, building new buildings, supplying raw materials, etc.) and paying taxes that will offset the lower taxes received from the business. Some proponents say that the government will actually come out with more revenue because it will receive more taxes from workers than the offset to business creating a surplus.
OK, you knew this was coming, the other side of the debate. That’s the one referred to as “Trickle-Up” economic policy. This is policy is most associated with John Maynard Keynes (another of the heroes) or Keynesian economics. Keynes argued that no matter how many things the plant makes, if people don’t have money, they wouldn’t buy them. His solution then was for the government to inject money into the economy through investments in infrastructure and to reduce interest rates. This is the policy used to create jobs during the Great Depression. Opponents argue that this plan didn’t work and that the economy didn’t “fully” recover until industry ramped up production for the Second World War. Proponents say it was the only thing that kept the economy from collapsing until the start of WWII. The concept though is really quite simple and effective. By injecting money in infrastructure projects, more people will have jobs, and money to spend. If people have money they will buy things, increasing demand, requiring business to increase production resulting in more jobs, etc. The policy goes on to break down the idea that lower wage earners spend more of their earnings buying goods and services than upper wage earners. Thus the idea of “Trickle-Up”.
You can agree or disagree with either approach by just listening to what someone on TV tells you to believe, or you can do some independent research and form you own opinion. I prefer the latter. Ultimately, the proof will be in the pudding. For that, we need time to allow fiscal and monetary policies to take effect. The last administration had eight years to effect policy and time to see results. This administration is only ending its second year. It would be interesting to study trend lines during the eight years of the last administration from start to finish to see if we could discover where it started and where it finished, but that is another story. Anyway, just wondering.
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