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Drummond's Rules of Economics and Politics

The coming election is about the economy, no matter what the political-party-about-to-be-hit-with-a-ton-of-voter-rage claims. Oddly, this is the same myopia which blinded the other political-party-slammed-for-missing-the-obvious in 2006 and 2008; seems to be common for D.C. to be D.O.A. on the basics. There needs to be some basic primer about how money works in political terms, so I offer the following basic rules which drive the political consequence of money:

1. Everything has to be paid for

It's quite fashionable for politicians to promise whatever the public wants, or at least the targeted voter bloc. But sooner or later, the services and goods have to be paid for, and with real money. Delaying the inevitable only adds interest costs to the total.

2. Taxpayers pay for everything the Government buys

Don't be fooled when some official tries to say there will be no tax increase for a program, or that it will be paid from by another government or corporation. Other governments serve groups of taxpayers who won't accept higher taxes either, and eventually the cost will come back around to your country again and hit the citizens. As for corporations, these are made up of people who don't like paying taxes, and so a corporate tax will result either in higher prices, lower employment, or both.

3. People never like taxes

Joe Biden is a liar and a moron. No one, absolutely nobody will pay a penny more than required in taxes. Folks will pay what they feel they must, they may make virtuous noises to feel better about paying, and they may form mobs and demand that some certain person or group should be made to pay more in taxes, but no one chooses to pay more than they believe they have to pay.

4. Politicians lie to you about how much you have to pay

Politicians will either promise that your taxes will go down, or if taxes must go up, that someone else will have to pay more. Knowing how much people hate paying taxes, no politician planning to stay in office will ever tell you directly that he expects you to pay more.

5. There will never be a system where everyone pays a 'fair' amount of tax

There are several reasons for this fact. First, it's impracticable in any medium-to-large country, since people will constantly try to reduce the taxes they pay, through resistance, political and legal actions, or just plain evasion and avoidance tactics. Second, no government truly wants a transparent system for collecting taxes, as this will inevitably lead to comparison, complaint, argument and further questions about who gets paid and why. By playing groups against one another, adjusting one group's tax rate up or down to make it more "fair", governments distract the public from figuring out how much it is really gouging them.

6. Revenue is dependent on the health of the economy more than any other factor

This is sometimes missed when planning growth and forecasting revenue, whether by companies or governments. You need a healthy economy overall, in order for your goods or services to produce revenue. For tax purposes it is even plainer - you cannot collect money which is not there. Consequently,

7. The only functional tax rate is the one which maximizes revenue with the least interference with the economy

This is not a new idea. Remember the story warning not to kill the golden goose? The idea is that you pay attention to how folks are doing before you tell them they need to pay you more money. At the very least, tax increases (and ending prior tax cuts are tax increases, semantics won't save you) should never happen when the economy is in decline, especially during a recession, and only a brain-dead moron would consider them when unemployment is 7% or higher. To bring in tax revenue, you need to spur job growth, because only when people have jobs can you get income tax from them. And to spur job growth, you have to lower the tax rate. Here's why - the cause of every economic crisis always comes down to consumer confidence. When people stop buying things, the economy collapses, it's really that simple. And when taxes are high, people worry about them and spend less, which causes businesses to slow down and fail. When businesses slow down, they lay off employees, which obviously raises unemployment. A low tax rate with low unemployment is better for revenue than a higher tax rate with a higher unemployment rate, as should be patently clear. There is a floor rate beyond which revenue fails to improve, but it is undeniable that in any recession, the most effective means to improve employment, and in so doing improve revenues from taxes, is to reduce the tax rate.


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Comments (10)

"The only functional tax ra... (Below threshold)

"The only functional tax rate is the one which maximizes revenue with the least interference with the economy"

What a novel idea. Too bad that Democrats don't believe that. Those EVIL rich are LOADED with money. And as for raising taxes, why right here in sunny Kaleefornia, the idiots raised tax rates last year......and guess what......the revenue coming in IS LESS THAN LAST YEAR UNDER LOWER RATES. Could it be that 10% unemployment rate? So their solution this year is.........LET'S RAISE TAXES AGAIN!

DJ - Some comments... (Below threshold)

DJ -

Some comments...

1. - You'd think this would be a no-brainer - but like a kid with a credit card and a hell of a credit limit, the folks inside DC disregard this. WE can't, of course - but then, they're not the ones that have to pay the bills. They never are.

2. - Self-evident. The money's got to come from somewhere - and selling off debt to foreign countries is a lot like taking out a payday loan. You're never going to pay off the principle, the interest rate eats you alive.

And don't think of taking out another loan to pay that one off. That way lies madness. (And $13-14 trillion in current indebtedness.)

3. - Heh. Funding is needed for a lot of government services, but a balance needs to be maintained between 'enough to do the job' and 'we've got extra money, let's hire extra people, and figure out what extra stuff we can to do justify the extra expense.' Too much money leads to too much growth.

"Nice to have" doesn't always equal "Essential to the country." I think we're going to be finding that out real soon now.

4. - Aren't used car salesmen rated as being more ethical than politicians at this point?

5. - I'm a fan of the 'Fair Tax' proposed by Linder and Boortz. Hasn't a chance of passage - but I think it's a bunch of good ideas and would help a hell of a lot. It'd be hard to hide Washington's excesses - which is another reason it's not getting much traction.

And seriously - would it be worse than our current system? If nothing else, we could get tax revenue from illegal immigrants.

6. - I can forecast winning the lottery tomorrow - but I'd be a fool to add the expected earnings into my regular budget and then start spending accordingly. I'd like to see an amendment passed that would require governmental spending cuts of at least 10% annually until the Debt is paid off and an operational reserve is built up of 1/2 year's 'normal' expenses. Of course, with $13-14 trillion debt already, it's going to take some time to get that reserve built up.

(Only exception? National defense and FEMA.)

7. - Get over using taxes as punishment. Get over 'hating' corporations. Get over hating the rich. If you're looking to maximize the output of wool from a sheep, you shear him each year - but not too close. You get the wool, you're happy, the sheep's happy, everyone benefits. Cut too close, you get bloody wool, and a sick sheep that's not going to give as much wool the next year.

Skin the sheep, and you get a bloody hide and a pile of meat. No more wool.

You might hate the sheep with a passion - but you need the wool, so you'd better keep the sheep healthy. YOUR prosperity depends on it.


I like it. I doubt the resident leftists will understand the concepts, though...

I would also point out that... (Below threshold)

I would also point out that people who repeatedly tell us that we don't pay enough tax (Buffett and most every dem) are usually doing their best to pay as little tax as possible. This makes me ask, are you paying all of your taxes or are you sheltering your income and if you think we aren't paying enough you can always chip in extra. You didn't see the Kennedy's paying as much tax as owed, you see Kerry avoiding if possible as much tax as possible and Buffett uses the long term cap gains rules to pay himself in a way that avoids as much tax as possible too, so why do they all spout off about paying more tax when they dodge as much as possible and why are they never asked to explain the difference between their words and their deeds.

"so why do they all spout o... (Below threshold)

"so why do they all spout off about paying more tax when they dodge as much as possible and why are they never asked to explain the difference between their words and their deeds."

Its called liberal hypocrisy. Do as I say, not as I do. Live how I say, not as I live.

"The only functional tax ra... (Below threshold)

"The only functional tax rate is the one which maximizes revenue"

I would rephrase as '...the one which brings in only as much money as needed for government to function', as I wouldn't like it if the government was spending three trillion dollars a year even if tax rates were on the low side.

"And to spur job growth, you have to lower the tax rate."

You're skipping over some critical steps. In order to spur job growth, you have to give employers confidence that they'll recover their employment related outlays and you need to give consumers confidence that they can afford to spend the money they're not now spending... and to do that, you have to first stop doing things that scare employers from hiring and consumers from spending... and while it isn't the only way to do so, cutting tax rates is a great way of letting people know the government isn't going to be sucking even more money out of their pockets. This is why one-time rebates don't have much of a stimulative effect, the public knows they're not permanent and that if government isn't cutting rates, they're about to raise them, so they save their rebates in order to help pay for the future higher taxes.

Excellent summary.... (Below threshold)
Jim Addison:

Excellent summary.

No one pays extra taxes - the annual average of donations to the Treasury is less than $150,000. So when people like Buffett and Soros start telling us our low taxes on the rich are "immoral," they are also telling us they are immoral, since believing as they do the only moral course would be to donate what they estimate as a "just" amount.

Federal debt isn't of itself a disaster, especially in the post-Reagan years. We've enjoyed steady growth, low but steady inflation, and have been able to keep interest rates low. The debt we've sold the world has for the most part represented a significant profit for us for a couple of reasons. First of all, the return on the low interest rates is also continually being eroded by inflation (albeit low enough not to draw much notice), so the net effect is we are using money today and repaying less tomorrow. The foreigner buyers understand this, of course, but most of them are primarily interested in the safety of the principal, not the rate of return, and we remain the world's safest haven, so even a bit of erosion of principal isn't so painful.

Secondly, if the foreigners do not roll over their debt, they are paid in dollars. If you have dollars, you will either have to barter them at a discount for some other medium of exchange, or eventually buy something from America. They invest their ridayhs and kopecs and rupees and yuan, and we pay them back in dollars - we get them coming and going, like a carnival scam.

It works great, and it could keep on working almost indefinitely, as long as no other world power came to be seen as a safer place to stash your cash. The problem is the Obama spending spree has set up a debt bomb for us which will be hard to avoid. Already the Fed is proposing to move their funds from maturing mortgage instruments into federal debt, but they can't buy enough to move the kind of paper we will have to move pretty soon (not to mention the removal of billions from the available mortgage funds while the housing industry remains underwater).

When there aren't enough buyers, the return (interest rate) must rise to attract more, because the debt MUST be sold or we begin shutting down federal agencies and departments within days. When the rates go up enough to sell Obama's party debt, they will choke private capital investment and thereby the recovery.

Oh, it's a fine pickle we're into now . . .

I would argue that it's not... (Below threshold)
Don L:

I would argue that it's not so much about money but about conservative moral values. The missapropiation of funds, the payoffs to unions, the parties in Spain, the stealing of our grandchildren's wealth, the castigation of big oil, insurance, doctors (that tonsil thing) the slaughter of fifty million innocent souls, the captivation of the black vote with tax dollars,propagandizing children about the environment, dividing America into special interest groups to use for power, is but moral breakdown.

The left knows wht's right in economics, but they can't beat capitalism by allowing it to continue -that's a moral issue - not an economic issue.

If we can't understand that immorality is what allows our leaders to lie, manipulate,be corrupt, and deliberately destroy the economy, at our expense and for their own power, we are as the song says -blind and cannot see.

Reality will only be denied... (Below threshold)

Reality will only be denied for so long. The check always comes due - and it's being carried to the table now...

Been a hell of a party, we're gonna be a while paying it off.

You missed:Any tax... (Below threshold)

You missed:

Any taxpayer, no matter what level of services he/she receives from any governmental unit at any level, will tell you that taxes are too high.

Great post DJ. I'm actually... (Below threshold)
Brother Bob:

Great post DJ. I'm actually planning on writing on my own blog a more in depth several part series on "Economics for politicians"- this touches on a few points I'll be making. Keep it up, brother!






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