No Such Thing As An Opinion!

August 15, 2011

Warren Buffett says to raise taxes on the rich.  My "A-Ha!" moment:  Are low taxes limiting productivity?


I had another "A-Ha!" moment today!

I love these moments!  I suddenly think of an explanation for some type of behavior or activity, an explanation that I've never heard anyone
else mention!

These are exciting for me, because "A-Ha!" moments can lead people toward solving the world's problems!


It was after reading the following article that I had my "A-Ha!" moment:


Today, CNN
reported:

"Billionaire investor Warren Buffett, saying he doesn't want to be 'coddled' by Congress, says that wealthier Americans should pay higher taxes, and that higher taxes do not dampen job growth.


Buffett, chief executive of Berkshire Hathaway (BRKA, Fortune 500), wrote in an op-ed piece published Monday in The New York Times that taxes should be raised on Americans who make at least $1 million per year."


and
 

"He said that 40 million jobs were created between 1980 and 2000, when the tax rate for the rich was higher than it is now. 'You know what's happened since then: lower tax rates and far lower job creation,' he wrote."



Before I disclose my "A-Ha!" moment, let me provide some context for you regarding my general views about taxation.



My Views On Taxation


Here's what I think:


On the one hand, everything else being equal, knowing
nothing about the economy or any other factors, it's better to let consumers handle their own money (tax cuts) rather then let the government handle the individuals' money (tax increases).

I believe this to be
indisputable, because individuals have more of an incentive to spend their own money well than the government has to spend the individuals' money well. (If we ever reach a point where the government is run by people that actually want to advance the overall interests of the country, perhaps this will change).

But when one has information about
other factors, it's possible that tax cuts may not be the optimal solution:


1) There must also be an optimal level of
taxation itself!

After all, if lower taxes are
always better, then why tax people at all?  Because taxes are required in order to provide services for society!

Therefore, there
must be an optimal level of taxation. Right?

So, just because lower taxes are
generally the better policy, who's to say that the current level of American taxation isn't already lower than the optimal level?

If current taxation rates are
already lower than the optimal level of taxation, that would mean that taxes should be raised, not lowered!


2) The American government's debt is about fourteen trillion.


Without debating whether a country should be borrowing money, one might argue that taxes should be raised for one simple reason:


The country has bought items with borrowed money.  The country hasn't actually
paid for the items! 

Therefore, one might argue that taxes should be raised in order to begin paying for the unpaid goods America has purchased!


However, the answer isn't as simple as that.


Borrowing money that you don't have
can be a wise move, if you invest that money at a rate of return that's greater than the interest rate you pay to borrow it!

Unfortunately,
America actually invests the borrowed money at a negative interest rate!

This suggests that America should either aim to reduce its borrowing habits drastically or should begin investing the borrowings at a
positive interest rate!


3)  There are other factors to consider, but I don't need to list them all in order to make my point.  I just wanted to provide you with an overview of a couple of the more important factors, prior to outlining my "A-Ha!" moment.



Which Brings Me To My "A-Ha!" Moment


After reading the following comment by Warren Buffet, I had my "A-Ha!" moment:


"
He said that 40 million jobs were created between 1980 and 2000, when the tax rate for the rich was higher than it is now. 'You know what's happened since then: lower tax rates and far lower job creation,' he wrote."


Here's my revelation regarding the 1980 to 2000 job boom (during a period the wealthy were taxed at higher rates):


Those higher tax rates resulted in greater government revenue, right? 


Is it possible that the greater revenue made its way to people who happened to use that revenue in a
particularly productive way, resulting in the job boom?

Here's my theory:



We know there are people who encounter financial difficulty, people who are stressed and have little free time to pursue hobbies and other projects.  These people often require a second job in order to make ends meet.


It's possible that greater government spending (from the higher tax rates) is reaching these people, resulting in them becoming more financially stable.


In turn, these people become less stressed and no longer require a second job.


Having more free time (along with a clearer, less stressed mind) these people become more much more productive members of society, as they are now able to choose how to spend their time that was previously spent working a second job.


To choose to use their free time in a manner that more closely matches their aptitudes.



How could such a scenario
not result in a net benefit to society?  Wouldn't you expect that scenario to result in more small businesses being created?  Wouldn't you expect to see more products and services being invented?

Could it be that these
threshold citizens were assisted during the high tax period of 1980 to 2000 much better than they were assisted during the lower tax period of 2001 to present?

This is a
perfect example demonstrating that there is an optimal level of taxation.


But Was There Really Greater Government Spending During 1980 to 2000?

But when you compare government spending during the two periods (1980 to 2000 versus 2001 to present), the government might not have actually spent more money during 1980 to 2000!  Here's why:

Although the wealthy were taxed at higher rates from 1980 to 2000, did that extra revenue actually cause the government to
spend more?

After all, the government perennially receives less revenue than is required to pay for its expenses.  As a result, the government simply borrows money to fill the gap. 


The government prepares a spending budget and borrows the money required to pay for it.


Who's to say that the extra revenue during 1980 to 2000 resulted in the government directing
more money to those threshold people?


Conclusion

Regardless of how the government spent its money, I've highlighted an area of research that I'd like to see more people focus on:

Study
threshhold citizens.  Citizens whose productivity rises at an extraordinary rate once the government assists them financially!


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