Monday, July 13, 2015

Solving the Greek Debt Crisis, VI: Some Taxation Specifics

We’ve now established (at least to our satisfaction) that the way for Greece to get out from under its burden of debt is to become productive — and to do that in a way that enables every single child, woman, and man to become a producer of marketable goods and services in amounts sufficient to repay old debt, meet current consumption needs, and build up a moderate store against a rainy day.

Only labor to sell...and no jobs.
The problem, however, is twofold.  One, human labor is being displaced by technology at an accelerating rate — and it’s technology that most people don’t own.  If you don’t have a job, and you don’t own capital, you can’t produce anything and you are dependent on the State to meet your consumption needs . . . and the State does not produce wealth.  It spends wealth it takes from people.

Two, most people don’t have the wherewithal to purchase the capital that is displacing them from production.

The answer?  An aggressive program of expanded capital ownership — an economic democracy act for Greece, the birthplace of democracy — funded with future savings, not past savings, thereby enabling every child, woman, and man to own capital that pays for itself out of its own future earnings.

Good use of money and credit makes you productive. Bad use makes you poor.
Some key features that are absolutely essential are tax reform, monetary reform, and the proper use of the commercial and central banking system.  Today we will look at tax reform.

ALL taxes are counterproductive, a disincentive to economic growth.  The worst tax, however, is a consumption tax, which by its nature falls heaviest on those least able to pay: the poor.

Here’s how it works.  Let’s assume that the only tax is a consumption (sales) tax.  Everything else stays exactly the same.  In economics we call this ceteris paribus — “all things being equal” except for the one thing you’re fiddling with, the “independent variable.”  Let us compare two people.  One guy has an income of €1,000,000 a week (he’s one of those Greek tycoons you hear about), and another has an income of €10,000 per year.

ALL taxes are counterproductive, but what tax does the least harm?
The cost of living for both of them, sales tax included, is €10,000 per year.  Did we mention that the Greek tycoon is also a terrible skinflint?  The sales tax is 10%.  Doing the math, both of them are paying €909.09 in taxes every year.  What is each one’s effective annual income tax rate?

For the guy making €10,000 per year, the effective income tax rate is the same as the sales tax rate because he spends every cent (yes, the Euro is divided into 100 cents) just to meet living expenses: 10%.  For the guy making €52 million per year (€1,000,000 per week), however, the effective income tax rate is .002% . . . and that’s rounded up.  The guy making €10,000 per year is paying (hold on to your teeth) an effective tax rate 500,000% greater than the guy making €1,000,000 per week — that’s half a million percent.

Think about that for a moment.  Now consider the effect of changing from a regressive consumption tax to a single rate income tax.

By shifting to a single rate income tax levied only on income above what is needed to live decently (in this example, €10,000), imposing an income tax of .004% on all incomes above €10,000 would generate the same revenue as a 10% sales tax (ignoring the rounding differential, of course), except that the rich guy would be paying it all instead of half.

And here’s the clincher: the guy making and spending €10,000 per year would likely continue spending all his income.  The difference is that instead of paying it to the government, he would purchase more and better consumer goods, increasing demand by 10%, creating jobs and increasing the tax base, eventually lowering the tax rate as more people have income to tax.

"Hanging with the hetaira, yeah, yeah, yeah!"
Another benefit is that the miserly rich guy would realize that, no matter how little or how much he spends, he pays the same amount in tax.  He, too, will continue to spend at least the €10,000 he did before, and probably more, since it no longer pays him to be a miser.  He might even find it’s fun to have a little fun, or having something besides beans and octopus for dinner every single day — and a snappy new chiton and himation (tunic and cloak) will get you more hetaira (ancient Greek for party girl) than raggedy old exomis and chlamys (short chiton and himation).

That’s at the personal level.  At the corporate level the key reform to institute is to make all dividends tax deductible . . . and raise the corporate tax rate.  The board of directors then has the choice of paying no taxes by distributing all earnings as dividends, or paying through the nose for the privilege of reducing demand in the economy and making their own business less viable.

But, you reasonably ask, how are corporations supposed to finance new growth and create jobs if they don’t retain earnings?  Good question — and one that we’ll answer tomorrow in the posting on monetary reform.


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