Tuesday, January 29, 2019

Variable VAT Tax to Regulate Resource and Product Flow in an Economy

Variable VAT Tax to Regulate Resource and Product Flows in an Economy

So the title pretty much says it all. Let's get to a few details.

If the government imposes a sales tax on an item, not only do we expect an increase in tax revenue, but we also expect an increase in the price of the item.*  For almost all goods, (and here we will ignore any possible exceptions,) the quantity demanded will also decline. Because of this, a sales tax may be used to regulate the demand for, and therefore, although perhaps after some delay, the production of, a given product. By increasing the sales tax, both demand and production will be reduced. By reducing the tax, demand for and production of, a product will be increased, over the current quantity demanded.
Now, there is no particular reason why we should restrict ourselves to a positive tax, if for some reason,we wish to stimulate demand for a product beyond the present demand. We can impose a negative.sales tax on a particular product sold. The price to the buyer will go down, the quantity demanded will increase, and production will eventually rise to meet this subsidized demand.

And of course, there is no reason to restrict such a variable tax to finished goods or services. It can be imposed at any point in any market in any supply chain. Indeed, in countries with a VAT, the mechanism for such regulation and control of production is already in place.

With such a tax in place, resources can be directed to any place in an economy. In particular, resources can be directed to where they are most needed, say in response to some disaster, and not just to where the demand is greatest. Indeed, society's current practice of meeting any particular demand, that is, responding to some local surplus of money, may not always be in the best interests of the society, or its economy.
If, for instance, more infrastructure is needed, demand in that sector can be increased, while at the same time reducing the demand in other, more discretionary sectors,where resources may be being inefficiently used, or even wasted.

In the case of imports and exports, the same mechanism of variable taxation may be used. A goal, here, of course, might be to establish a balance between the value of imports and exports. Another might be to encourage an export of finished goods, and encourage an import of factors of production.
And of course, this system of allocation could be made completely transparent.
Naturally, there are many technical details which would have to be dealt with, most particularly how to deal with the relative differences in the elasticities of supply and demand for any given product or factor of production. However, I am confident that such difficulties can be worked out.

The main obstacles I see to the establishment of this, or indeed, any rational system of allocation of resources in an economy, to be political.
*Almost always.  The only possible exceptions would seem to involve a completely elastic supply base, with a high margin of profit above cost capable of completely absorbing the tax. The price may not change, as the profit would decline by the amount of the tax.

With totally elastic supply, however, the price is generally driven down to cost by competition, and the margin of profit is at or near zero.

Monday, December 31, 2018

Links to Quora

Back, and it's been two whole days!  So  I'm going to post links to (some of ) my answers in economics on Quora, here, just so they're all in one place.  In no particular order.  For your convenience.

https://www.quora.com/Would-the-world-economy-benefit-or-suffer-from-a-sudden-revival-of-the-Gold-Standard/answer/Charles-St-Pierre  Mostly suffer


 https://www.quora.com/Is-there-a-fundamental-flaw-in-the-free-market-theory-that-leads-to-the-deprivation-of-property-and-concentration-of-economic-power-through-debt/answer/Charles-St-Pierre  And see my comment at the bottom.



https://www.quora.com/Why-should-I-hate-free-markets/answer/Charles-St-Pierre Why you should fear free markets

PBOC injects record $83 billion into the financial system - Asia Times  So this was reposted to Quora,  I posted a comment there suggesting that the financial system was the wrong place to put the money.  They should instead have a negative sales tax.  This would pretty immediately stimulate demand, and make everybody happier at the same time.

However, further thoughts occurred to me, which I (will) discuss above.

Government and the role of violence.

Saturday, December 29, 2018

Moving My Activity

Due to the underwhelming response to my posts on this web site, I have moved my activity here to Quora.

A few parting thoughts:

        It is important to determine what is important.

        People who are paid to think, think what they are paid to think.

           "It ain't what you don’t know that gets you into trouble. 

            It's what you know for sure that just ain’t so."

                                   Mark Twain  (1835 - 1910) American Author*

Finally, this little dose of concentrated wisdom from Terry Pratchett (1948-2015) British Author  
           From Carpe Jugulum, (with thanks to Elspeth Cowrie and her answer at Quora) 

"And that's what your holy men discuss, is it?" [asked Granny Weatherwax.]
"Not usually. There is a very interesting debate raging at the moment on the nature of sin. for example." [answered Mightily Oats.]
"And what do they think? Against it, are they?"
"It's not as simple as that. It's not a black and white issue. There are so many shades of grey."
"There's no greys, only white that's got grubby. I'm surprised you don't know that. And sin, young man, is when you treat people like things. Including yourself. That's what sin is."
"It's a lot more complicated than that--"
"No. It ain't. When people say things are a lot more complicated than that, they means they're getting worried that they won't like the truth. People as things, that's where it starts."
"Oh, I'm sure there are worse crimes--"
"But they starts with thinking about people as things."

Thank you for your time and attention.
                              Another Amateur Economist
*I have since learned that this attribution is unlikely.

Wednesday, November 15, 2017

Link to: "Researchers chart rising inequality across millennia"

This link is too good to pass up, especially as our Republican Congress debates lowering taxes for the wealthy.

"Researchers chart rising inequality across millennia

Findings have profound implications for contemporary society"


One paragraph: "Their findings, published this week in the journal Nature, have profound implications for contemporary society, as inequality repeatedly leads to social disruption, even collapse, said Tim Kohler, lead author and Regents professor of archaeology and evolutionary anthropology at Washington State University. The United States, he noted, currently has one of the highest levels of inequality in the history of the world."

The Purposes to Taxation

There are four purposes to taxation.

1: Destroy money. The government doesn’t need to tax to spend money. It just has to write the check. However, money it spends adds to the money supply, and this would cause inflation if an equal amount of money wasn’t taken out of circulation or destroyed. If money is taken out of circulation but not destroyed, as when the government borrows to spend, (which it rarely has any need to,) and this money is accumulated by the financial sector, the potential for inflation remains, and increases as the amount of money in the financial sector increases.

2: Discourage certain behaviors, or, through negative taxes, ie subsidy, (a word for particular forms of spending,) encourage certain (other) behaviors. All spending, of course, encourages the production of what it is being spent on. (Allowing for profits, of course.)

3: Redistribute demand, and therefore wealth. More or less egalitarian societies, such as democracies, cannot survive an excess of economic inequality. Money represents economic rights. That is, economic rights are proportional to wealth and income. Economic rights cannot be completely separated from political rights. An unequal distribution of economic rights results in an unequal distribution of political rights. This phraseology, however, is sort of a contradiction, since political rights may implicitly be regarded as those rights held, and that wealth shared, equally by all citizens in a society. Precisely: The only difference between economic rights and political rights is the method of allocation, and their resulting distribution. A more proper phrasing, then, would be that increasing economic inequality results in an increasing conversion of political rights to economic rights. A sufficiently progressive tax system can prevent this from arising, and so help to maintain a system of political rights. An egalitarian government, therefore, will tax economic rights, so limiting the scope and degree of inequality, and subsidize political rights, so enlarging the scope and degree of equality. The dynamics and stability of this process is itself interesting, but beyond the scope of this question. However, the first goal of every proto- oligarchy is the reduction of the progressivity of taxation to a level insufficient to prevent the increasing of economic inequality.

4: Validate its currency. By requiring that taxes be paid in its unit of money, the use of that money is (very strongly) encouraged in that economy. Since using a single unit of money increases economic efficiency, this increases the quantity of free resources in that economy. This increases both the rate of sustainable consumption, and the rate of wealth accumulation in that economy.

Friday, August 18, 2017

How Misleading are Solar Yeilds?-- A Link

Here is an excellent discussion by Gail Tverberg, over at oilprice.com:  How Misleading are Solar Yields?.


While yes the main topic is indeed that named in the title, she also goes into an excellent discussion of Energy Return on Energy Investment (EROEI:  It is the ratio of energy spent to the energy produced. ) and its origins as a measure if energy return on human (and animal) labor.

She also deals with some important social issues when this ratio drops too low. Societal collapse seems alarmist, but others like inability of governments to collect sufficient taxes, seem to describe our current situation.  She refers to this book:

The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization
Jan 31, 2008
by Thomas Homer-Dixon

Her basic point is that the EROEI on PV Panel is (Probably grossly) overestimated.  She's probably right about that to some degree, since mostly we settle for industry figures. The complementary problem for oil, however, is that domestic oil production is also heavily subsidized which means we don't really know the true cost of extraction, and neither do we know the EROEI on it. 

In any case, the EROEI is certain to be less than we have historically been used to.  This has two implications: The first is that we must devote a larger share of the economy to developing and maintaining our energy supply.  And the second is that we will not be able to live as comfortably as we are used to.  If our unequal society is unable to adapt to this new condition, it will not survive, and this would be catastrophic.

While some of the issues in measurement  of EROEI return on PVs she raises I believe can be addressed, it is an important discussion of these issues, and as I indicated above EROEI issues in general.

Monday, July 31, 2017

Generalizations in Interpreting Supply and Demand Diagrams

In a recent post Hidden Benefits of Taxes we argued that while a tax wedge reduced allocative efficiency, it increased productive efficiency.  With a tax wedge,  a portion of the remaining Social Surplus was allocated to the government, the Harberger Triangle in the diagram being discarded since it was no longer being (inefficiently) produced.  Inefficient production is a waste of resources, often irreplaceable ones.  For a very nice post on this issue, see this book review of:  "Capitalism 3.0 A Guide To Reclaiming The Commons" https://www.amazon.com/s/ref=nb_sb_noss_2?url=search-alias%3Dstripbooks&field-keywords=Capitalism+3.0 (2006) book by Peter Barnes,over at Portrait of the Dumbass

So.  Consider the situation where the source of a product, the factory or the mine, is far from the consumer, and the cost of transport is significant.
The shipper must cover the cost of transport, so the price the consumer is going to have to pay will be much higher than the shipper pays the producer.  We also observe that the quantity bought from the producer will ordinarily be the same as the quantity sold to the consumer.  And we see that if we draw a diagram of the entire process, including the cost of transport, we have an identical diagram as if we had a tax wedge:  The wedge now going to cover the costs of transport, instead of going to government coffers.

Now the wedge covers all transport costs T so we can consider it as the resources consumed to include those that are necessary to support the capital involved in the transport.  This would as well include any retained surplus. What was actually surplus and what was cost to the shipper is not yet defined by the diagram.  Where the infrastructure costs are zero,  the wedge is merely the costs incurred by the shipper.

We note that high transport costs imply that the productive costs must be low, since only the most eager and wealthy of consumers are willing to pay the high prices for the product. Productive efficiency, per se, must be high.  There is thus a large Allocative loss, but also correspondingly large deferred costs.

Now, where transport costs are low, we see that there is still a market for those goods which are produced at a higher cost, with less efficient processes, among those with a lower inclination to pay.  With a lowering of transport costs, there is an increase in allocative efficiency, a reduction in allocative loss, and a reduction of productive efficiency

However, there is another way of looking at low transport costs.  We can say that lower amount of resources given over to transportation support a smaller infrastructure.

So we can consider a rectangular wedge in any situation where there is a cost between supplier and consumer, and the quantity supplied does not change.

Now we will define a community to consist of consumers and the local businesses to support them. The supplier will input into this community.
The supplier will sell to the local businesses, who sell the input to the consumers.  The difference between the price the businesses pay and the price the consumers pay the businesses, times the quantity supplied by the businesses, is seen to support the businesses.

The interesting thing is that the size of this wedge, that is, the size of the business sector in the community, depends on the inefficiencies involved in the conveyance of the input from the suppliers to the consumers.   A totally efficient conveyance between supplier and consumer would eliminate any business sector in the community.

The point is, while from one point of view this wedge is wasted resources, from another point of view it supports the business sector of the community. And from that point of view it is not wasted at all.  Indeed, let us look at the worst possible alternative to the community:  Suppose a more efficient supplier is able to provide inputs directly to the consumer, at just below the price community business would have been able to supply them.  We see that the consumer is marginally better off, but the business sector of the community has essentially been destroyed.  Virtually the entire surplus has been absorbed by the supplier, and the surplus which would have gone into the community to support the business sector is denied the community..

Where the transport costs become low, it may become in the interests of the society to increase the tax wedge, in order to maintain productive efficiency.  And see the previous discussion at http://anamecon.blogspot.com/2017/05/hidden-benefits-of-taxes.html