Blog Posts

The Inflation Tax's Laffer Curve

7/27/2014

The Laffer-Curve is all about how people change their behavior dealing with labor that is taxed at increasing rates. You are more willing to work if you are offered more money based on your after-tax income. After a certain high tax rate, the work no longer makes sense, and you decline the job. The tax base drops, thus average incomes and tax revenues drop as well.

Inflation is also a tax. Inflation shaves off a little worth from every dollar and combines that worth in new dollars. While the increasing income tax rates discourage work, the inflation tax discourages saving because the inflation taxes savings. Savings is the base of capital and capital is the necessary ingredient for capitalism.

Inflation causes uncertainty and businesses dislike uncertainty. Inflation is often hidden for a time and revealed all at once and causes market crashes and business failures. Inflation does the most harm to those on a low fixed income such as those retired or on government assistance. Inflation harms lenders because they are being paid back with devalued dollars.

All this being said, the Laffer Curve is about the tax base dropping resulting in lower tax revenue. There is not a nice curve, just the knowledge that the greater the inflation, the greater in the disturbance in the economy that lowers the tax base.

Price Control Creates lower Supply, Lower Quality, and Higher Prices

7/27/2014

Note: This is merging two similar blogs from 2014.
One of the most under-appreciated laws of economics is “Something is worth only what someone is willing to pay for it.”
When this law is violated by government-imposed price controls, less economic transactions happen, and people are not able to benefit each other by trade as easily. When prices are held too far up or too far down, people find work-a-rounds in order to trade. Government is always trying to stop the work a-around to the detriment of overall trade, thus predominantly harming the poor.

http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_4/PThy_Chapter_4.html

When price controls on wages occurred under FDR, employers added value in benefits, creating significant harm. When price controls on steaks happened, butchers created different cuts of steaks that did not qualify in the price-controls. Work a-around government price controls were pervasive.

Currently, price controls on labor over forty hours a week, limit many to only forty hours, when many need more hours just to make ends meet. Obama care recently created extra expenses on employees that work over thirty hours a week, causing many businesses to limit any one employee to a strict 29-hour-a-week limit.

In the great depression, price controls on milk created situations where millions of gallons were just thrown out. Cattle and crops in the 1930s had price controls and production limits, creating massive disruptive effects. Many cattle were killed in the fields to rot while millions had very little to eat. The government economist back then knew that if you lowered supply, prices would increase. What they failed to realize is that higher prices send signals for more people to produce that item, thus conflicting with the production limits.

Politicians and government bureaucrats think that they know better how to price an item or at least the wisdom of putting low or high limitations on them. They are wrong. The role of prices in the free enterprise system which is based on billions of decisions by millions of people is far superior to what a Politician thinks is ‘fair.’ All price controls have many negative results; however, a small handful of people are benefitted. Economics is very complicated with many factors that influence many more factors. Thus it is difficult to see the full impact, more so, when counterfactuals are not available.

Labor law is perhaps the greatest infringements of people’s rights when the government limits what is legally acceptable when working for another. A two-party agreement turns into a three-party agreement. That limitation is by definition the number of labor contracts (jobs) in this economy. From the highly immoral minimum wage to over-time regulations among hundreds more, employees are severely limited from working for a salary that they would otherwise accept. Advocates for women and minorities try to protect people by limiting their labor contract options.

Commodities such as corn, wheat, oil, beef, and others have long had both minimums and maximum price limitations. Usually, a political contributor creates a good ‘story’ of how selling outside these regulations would lose jobs and businesses within their legislative district. The adverse effect is usually spread wide, hard to see and mild per person. The benefits are to a small group and substantial.

Tariffs and subsidies are government actions that ‘acts’ like price controls. Politicians disrupt the critical role of prices by adding government giving or taking money to industry. Taking money from tariffs reduces people’s efforts in gaining those items. Giving money with subsidies requires the higher disincentives of higher taxes and then promotes one industry over others by lowering costs of the subsidized items. Either way, it distorts the free market and diminishes the quality of life.

While all price controls do harm, having government control money and the price of the use of money over time (interest), is perhaps the most significant disruptions government can engage in. First, the government laws forbidding private currency, that pushes people in the government monopoly of money and that money being unbacked fiat currency is highly damaging. Second, having government control the interest rates by adding or subtracting money in or out of the economy reduces the great benefits of the role of prices in the free enterprise system.

Is There really Inflation?

5/25/2014

Inflation is defined as a sustained increase in the general level of prices for goods and services. Under this definition, there cannot be inflation or deflation. The change is merely in the value of the currency. If an item cost 10 dimes one day and the next day that same item cost 20 nickels, there is no inflation just because 20 is more than 10.

This general price level is for goods and services. Therefore, basically both the buyer and seller. Since the buyer and seller always match on price, there cannot be a general price increase. As productivity increases, the value of one’s labor and services increase. This manifest itself in both lower costs of goods and services they are providing and higher income for the person that is more productive.

Therefore, the general price when looking at labor and goods have to stay neutral. Any time the price to make an item drops, the price drops as well. Since every economic transaction has precisely the same amount paid by one as received by another, inflation is impossible. Surely, one commodity can rise or fall compared to others or the average.

The key to currency is always to have the money backed-up by things of real value as in Haley2024’s Monetary Policy. Money should not be just pegged to gold or a basket of commodities. Instead, every coin or paper currency has real property in which it can be traded. Once traded in, we are left with less currency and also less property used for backing up the currency.

The value of the currency is always the value of all the property used to back up the currency divided by the number of units of that currency. If one adds currency and not assets to back it up, one simply changes the value of that currency. Instead of owning 1/100X of the property used to back up the currency, after adding 10% over 18 months, now the same dollar can demand only 1/110x of the same amount of assets.

Monetary Policy

Money on the Closed Island

A Scenario All Economics should be Viewed

The Value of Fiat Currency

QE is Not Printing Cash from Thin Air

Quantitative Easing (QE) = Devalued Money

If one had a large pile of Yard Sticks and were going to lay them down to measure a football field, it would take precisely 100 yardsticks. If the owner of the field, Fred Reserve, wanted to inflate or lengthen the size of the field, would Fred accomplish that by shaving off one inch from every yardstick and claiming his field is now 103 yards long because now it takes 103 Yard Sticks to reach across the field? The field did not get longer; the measuring sticks got shorter. The same applies to money.

If one is using the un-backed-up money, it does not matter if the three apples are $3 or $300. It just matters that the person receiving the $3 can buy three oranges with that three dollars. If a person needs to pay $300 for three oranges, then he will sell his three apples for $300.

Two people agreed to trade three apples for three oranges. The next week the negotiation resulted in three apples for two oranges. The price of oranges went up by 50%, and the price of apples dropped by one-third. The result is one price falling and the other rising. The rise and fall precisely offset. Thus, the general price level stays the same.

The Poor are Harmed the Most by the Effects of the Laffer Curve

4/13/2014

For the most part, the poor are less educated, less experienced, and have less access to capital. These three factors are crucial in creating a comparative advantage over others, thus making the poor’s comparative advantage much smaller. The more significant the comparative advantage, the longer you can overcome increasing tax rates.
The Laffer Curve

A business owner who has proven to create wealth, not just for themselves but also for all the people whom they hire and purchase products from, are too often discouraged from expanding or starting a business because of high tax rates. Many of these successful businessmen have already acquired wealth and can have a good lifestyle without working. Higher tax rates discourage businessmen from benefitting all of his would-be employees.

Supply and Demand

An ever-growing tax rate continues to discourage businessmen from starting businesses and employing people. Having a decreasing level of jobs and a steady increase of the number of people needing to work drives down wages when people offer their labor services for less so as not to be out of a job. It is also correct to state that 100% of the taxes are paid by consumers; thus, the consumers pay all business taxes. Perhaps, the greatest tax is the loss of services and products by businesses not started.

Money on the Closed Island

4/12/2014

People on this island got tired of bartering because what they wanted to buy, and sell were with different people. They studied the advantages of currency and created one for themselves. They had everyone put something durable of real, confirmable and consistent value of theirs into a storage room.

They then created $100 worth of coins of every variety and denominations. In the beginning, every $1 coin was worth one percent of the value of the storage room. Anyone at any time could take their coins and trade their coins into the storage room for any product in that room based on price.

When someone exchanged a coin for a product from the storage room; the keeper of the storage room, the (Banker) would hold on to the coin, and there would be fewer coins out in circulation to match the fewer assets in the storage room. At any time, someone could deposit or withdraw assets in the storage room and exchange it for coins.

At all times the value of all the coins matches the total value of assets in the storage room. All coins would hold their value whether the assets are worth $200, and each $1 coin is worth 1/200 (0.5%) of the storage room or whether there is $50 worth of assets and your $1 coin is worth 1/50 (2%) of the total value of the assets of the room.

Every month all the people on the island bring all their coins to the bank (storage room) and counts the value of their coins and the value of the assets in the bank to verify the legitimacy of the value of their coins. If there is a disagreement on the value of any item in the storage room, anyone could buy that item in the free market and deposit that item in the bank for that agreed-on price. Likewise, one could buy anything in the storage room for that agreed on the price.

When trust and reputation is amassed, the assets do not need to be in the room, rather paper stating ownership of a percentage of a business, land, property, and specified number of bushels of corn, or other things of real and consistent value that is hard to hold in a storage room can be held instead. Trust and reputations are only amassed when it is tested on a regular basis.

Quantitative Easing in this Banking System

Quantitative Easing in this banking system would be the bank issuing more coins and not adding assets to the storage room. The value of each coin would diminish because now there are 101- $1 coins backed up by $100 worth of assets. The last person to the storage room to redeem their coins for real assets will get nothing.

Because it would be difficult to just change every $1 coin to a 99-cent coin, the opposite occurs. People just reevaluate the value of all products and services that used to be $1 to now be $1.01. If the bank does this 100 months in a row, they would double the money supply and keep the worth of the assets in the bank the same.

Because there is now $200 worth of coins backed up by the same assets that use to back up $100 worth of coins. The new value of all those coins is half of what it used to be. Quite simply, the value of all the assets in the bank always needs to add up to value of the coins in circulation. This in standard terms is called inflation.

Having a small economy like this shows the effect well. People will rightly see that the bank is taking the worth out of their money and consider it a tax. People will rightful lose trust in this bank. In a free market in banking, other banks could emerge that would not do QE and would gain the trust of the people. Federal law currently gives a monopoly on currency banking to the federal reserves and bans other banks from doing a better job issuing currency. Yes, the Federal reserve is adding more coins, roughly 1% a month, without adding assets to the bank to back them up.

John, you say this, and it is brilliant, however, how ironic is it, that it is your policies that debauch the currency. People stating that they are using your policies are to blame.

A Scenario All Economics should be Viewed

4/12/2014

Economics has many hundreds of factors that continuously change. It is often hard to flush out the cause or effect of any one policy. Data is often tough to collect. The collectors or those that analyze data often do so looking to prove their world view.

The Closed Off Small Town

Let’s imagine a small closed island that is populated by 100 people. Four groups of 25 each on different parts of the island. For the purpose of evaluating different policies, we are going to have this consistent starting point.

To make things a little more obvious, we are going to say that all trading happens only once a week. This includes ordering services or renewing employment contracts. After every change, we are going to understand how you and by extension, most others will change your/others behavior. Would you buy more, sell more, save more, work more, change what you value, or forgo today for expected benefits tomorrow? The study of economics is how will you and others change your behavior with changing circumstances.

Matching America, let’s state that 60 people are working for the purpose of trade. 40 people are either retired, young and being educated or taking care of a family. All the people do a certain amount of work just bettering their own lives such as cleaning and maintaining their house, property and themselves.

Everyone trading uses their comparative advantage to create a product or service for others. The 60 people trading are at different skill, experience, responsibility, and need levels. There are 10 that are employers, 30 that are employees and 20 self-employed.

The Economy

The starting point for every scenario is a $100x economy per week. Everyone trading brings their products or services to the market to trade. The following scenarios will always reset to this standard to eliminate so many factors changing at once. We know that every change in any one factor can have small to large factors in others; however, resetting back to this base, brings things into focus.

The Value of Your Labor versus the Value of Your Leisure

4/6/2014

There are 168 hours in a week. Every person must decide how to split them up between work and leisure. For most people they must work to earn money for their needs; however, after a certain amount of hours those earning switch from needs to wants. The labor hours for needs are highly essential to work; however, every additional hour worked becomes less valuable to you because they are for wants and competing directly with your leisure hours.

Likewise, every additional hour of leisure becomes less important to you compared to making those leisure hours better by working to have the funds to buy entertainment. For example, working for 20 hours a week just to meet your basic needs means that you do not have the money to travel, pay for a theme park, or buy that fishing pole. The first hour a week of leisure if you only had one would be much more valuable than the 50th hour of leisure of the week.

Every person must decide for themselves the correct balance. When determining their balance, one does not look at gross pay, rather after-tax pay. Based on the Laffer Curve and this teaching, people will stop economic activity sooner, the higher the tax burden because take-home pay is reduced.

Spending as a Tax

4/5/2014

Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax ... If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.

-- Milton Friedman

Deductions, Exemptions and Credits create a faster loss of economic activity

3/23/2014

To get the best understanding of this economic point, please fully understand the Laffer Curve

If the government needs $10 in tax revenue and has an economy of $100 the simple and best way forward is to collect a 10% tax. With the full comprehension of the Laffer Curve, we know that higher tax rates reduce economic activity. To get that $10 we need to tax at around 12% because the GDP of the economy has dropped about 12% to roughly $88.

If we exempt or allow the deduction for the first 50% of peoples earnings; we now have an economy of $50, and taxing wants not needs. People are much more willing to work with a higher tax rate if their needs are not met. Once extra income is just for a third vacation in a year, higher tax rates disincentivize extra work hours.
We must now move to the faster loss taxable GDP Laffer Curve chart, and we see that the most we could collect after a 51% loss of economic activity (thus people’s earnings) is $15 at a 30% tax rate.
Please note, $50 was the full taxable GDP after exemptions and credits; thus, we need to cut all the dollars in this chart in half.

Watch the whole thing to get a better understanding of the Laffer Curve, although the lesson on deductions is at 7:25

Great Economic Articles and Videos

1/29/2014

BEWARE OF OBAMANOMICS
By Tom Woods
for EURO PACIFIC CAPITAL

The Rediscovery of Classical Economics: Adaptation, Complexity and Growth By David Simpson
Sample of his book

The Laffer Curve page
much more on the manys economic lessons from the Laffer Curve.

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The Closed Off Small Town

The Economy

To get the best understanding of this economic point, please fully understand the Laffer Curve

The Rediscovery of Classical Economics: Adaptation, Complexity and Growth By David Simpson Sample of his book

The Laffer Curve page much more on the manys economic lessons from the Laffer Curve.

The Rediscovery of Classical Economics: Adaptation, Complexity and Growth By David Simpson
Sample of his book

The Laffer Curve page
much more on the manys economic lessons from the Laffer Curve.