Taxation, the States, and Trade

The State of Connecticut, and other states, are having increasing difficulty meeting the conflicting demands  of a declining tax base and increasing need for its services.  Next year the state must cut over $1 Billion of valuable and even critical services in order to balance its budget.

A recent article in Forbes ascribes the cause of the deteriorating tax base to the imposition of a personal income tax 25 years ago. (25 Years, $13 Billion Lost: Connecticut Income Tax Continues To Fail) *

But let’s look at something else which could be a cause:  According to “State Smart,” ** the state of Connecticut, in 2014, paid out  $53 Billion dollars to the United States government in taxes.  However, that year, it only received am estimated $45 billion in benefits from the federal government. Every year the people of the Connecticut give out to other states $8 billion.  The state and local share of that $8 Billion, (about 13%) works out to about $1 Billion in lost taxes.   And that is just one year.

It is up to the state’s Congressional delegation to address this problem, if they can.  In the meantime, the state is running the race with one foot in a bucket.  While bad, this can be mitigated.  The problem for the state, since it is easier for rich people, and more generally for businesses and corporations, to move than the working and the poor, is that the state is only allowed a regressive tax system. Since Connecticut is stuck in the shadow of pricey New York City, it must also pay more for what it buys.  These are not insurmountable problems.  They mean, however, that the state must attract enough wealth generating business activities that the tax load is not so burdensome upon the poor and the working class that it cannot be mitigated by proper state expenditures. And this means the state must have tax policies, and spending policies, and regulatory policies, which are attractive to those kinds of business activities which bring in money.

For instance, Corporations collect wealth from their many operations, and the place they accumulate the most of this wealth is at their headquarters. Other business activities which accumulate wealth are corporate offices in general, laboratories and factories.  All of these activities bring money into their communities, and into the state. 

These are activities the state wishes to attract and encourage.  While it cannot directly subsidize them, (Well, nominally, it could,)  it can capitalize the infrastructure these businesses rely upon.  Investing in roads and railroads, human capital, but perhaps even more importantly efficient institutions and the resolving of conflicts, including those inevitable conflicts businesses have with the state itself.   This will reduce the many costs of doing business in this or any state, and enhance the profit margins. 

For comparison, stores, in particular chain stores such as Walmart, Home Depot, CVS, McDonalds, (and Amazon) and so forth, take money out of communities, and out of the state.  Walmart itself takes several billions of dollars out of the state of Connecticut each year, and sends those dollars off to Arkansas. Much of the money which goes to the larger cable and telecommunications also leaves the state. This loss of money the state can, with proper taxes, and by taking the part of the communities and local store owners in their struggle with these large retail chains, diminish. 

There are other activities, which themselves do not generate wealth, but merely rearrange the ownership of wealth.  These may also be taxed.  Some of these businesses, like real estate, cannot leave.  The others, since they do not actually generate wealth, may be allowed to leave without penalty to the state’s economy.  These would include many personal services of all kinds.  Most of these personal services are elective, and raising their costs would not affect the well being of most people directly.  Most especially, these taxes would not have a critical affect on the well being of the poor.  For those services which were not elective, such as child care, the needs of the poor could be supported.  Indeed, for something like child care, the state would in general have and interest in subsidizing it for all possible clients, as this would form a more attractive workforce environment and this would be something to attract businesses.

The state is in the business of allocating resources.  Taxes take those resources from one use and expenditures put them to another.  In many cases, this fulfills social needs that the market cannot fill.  Quite simply, the market simply cannot supply any particular thing or service to everybody.  The laws of supply and demand guarantee that there will always be those who cannot afford fuel, who cannot afford shelter, who cannot afford adequate food, without intervention into the marketplace.  Private intervention, that is, charity, cannot suffice. For the charitable will find themselves at a competitive disadvantage to the mean and selfish.

As the production of resources within the state declines, the state must reach out to the production of other states, by attracting the functions of businesses which accumulate the production from other states.  And the state government must adopt policies which attract those functions.  It is only once this income is spent by the corporations and businesses that the state attracts, that the state can begin to collect taxes on it. And increasingly, the state becomes unable to directly tax its own production.  As due to increasing offshoring, domestic production declines, (And without tariffs, taxes cannot be collected on production in foreign countries,) competition for the remaining factories, other remaining production facilities and the headquarters of domestic enterprises, the offices and laboratories, will intensify. Only the intervention of the US government can stop this spiral to the bottom.  But in the absence of such intervention, a state government which understands this reality, and which is able to adapt to it will, for a time, prosper.

So only the actions of a government can assure that the needs of all of society are met. A government which fails in this, will eventually fail altogether, one piece at a time, as first the bottom, and then each higher level of society falls below its ability to sustain itself.  Only by capturing an adequate share of the incomes of the very wealthy can the government succeed at this. But first it must attract these incomes to itself. 

Since all taxation is against production, the government must capture all productive streams, in order to extract necessary income. Any streams it does not capture will be more competitive than those which must bear the additional cost of taxation.  When an economy runs a trade deficit, it must also tax foreign production, since otherwise domestic production will be uncompetitive with foreign production, and domestic production will be replaced, and government revenues decline.

Non-productive activities must also be taxed. Otherwise, economic activity will preferentially go to non-productive activities, since these will have the greater nominal profits.  In particular, the non-productive activities of the wealthy must be taxed, to prevent decapitalization of the economy.

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* http://www.forbes.com/sites/rexsinquefield/2016/05/23/25-years-13-billion-lost-connecticut-income-tax-continues-to-fail/#589c29771b80  (and others)

**https://www.nationalpriorities.org/smart/connecticut/

Our Financial Sector has Become a Parasite

This post is (mostly) a copy of a comment (@131) in response to reason (@123 & @ 124) over at Crooked Timber:  http://crookedtimber.org/2015/11/29/secular-stagnation-and-the-financial-sector/comment-page-3/#comment-650750

This is John Quiggin, the original poster, quoting himself in a previous post:

The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn’t produce much in the way of new private investment.

“Hugely costly financial sector” does not really describe what is going on:  Massive tumor sucking the life out of its host is a much better description.  The financial sector no longer serves society.  It serves itself.  Indeed, is 'Serve Oneself." not the motto of Capitalism?  While the financial sector, (and we are talking about the activities of the large, and very large, and the wealthy, and very wealthy,) does occasionally allocate resources in the rest of the economy, to the rest of the economy, mostly it plunders the resources of society and allocates those resources to itself, for its own engorgement.

My comment:

You have disinflation in the real economy, but inflation in the fictitious (financial) economy. They have become separate economies. Money is being taken out of the real economy and pumped into the financial economy. Not only does this drive up the price of financial assets, (like money, BTW. but other assets which do not have a real value in themselves, but only value depending on the health of the real economy. Most tech toys and their industries, for instance. ) but financial assets chasing each other also drive up the price of financial assets.

Imagine a continuum of reality, starting at the left and going to the right, most real on the left, and decreasingly real and increasingly imaginary as you go to the right : Food and energy, on the left end, mining, then manufacturing, transport, etc, retail, hospitality, etc. in some order, high tech in there somewhere, then money in its various forms, bonds, stocks, etc. derivatives, other phantasmagorical financial instruments. It is an enormous bubble of ‘value’ where each item to the right is dependent for its survival on the health of the parts of the economy to its left. If, for instance, the food and energy sectors collapse, none of the rest of it will have any value.

The economy on the right is easy to capitalize and leverage and extract (financial) profits. So all investments are allocated over there. ( Capitalism invests in what is profitable, and only incidentally in what is needed.) The economy on the left, however, is leverage poor, and profit poor, so it is instead being allowed to deteriorate, and even where possible, plundered for its capital.

It is the size of this bubble which is maintaining the value of the dollar. And as the bubble increases relative to the size of the money supply, the value of the dollar also increases. (There is also a deflationary effect due to the trade deficit, since money is continually being taken out of the real economy, and put into the fictitious economy when, say, the Chinese deposit their money in US banks.)

It is all, of course, a manifestation of debt. Were the debt of the real economy honestly accounted for, it would be clear to everyone that there was no possibility that the people who actually produce the things we need could ever paying those f**king bloodsucking leeches even a fraction of what our f**king masters of the universe have defrauded the people of the world out of.

Indeed, our masters own our world, and our country several times over.
It just comes down to the day they decide to collect what is owed them.

Who Really Pays Taxes

Steven Landsburg, at "thebigquestions.com" considers the issue of Mr. Robert Kendrick, who, though wealthy, does nothing but drive and park his four cars. Can Mr. Kendrick be taxed? Steven Landsburg says no. Many others say yes.
____________

Mr. Landsburg is drawing a distinction between the nominal and the real. They are too often confused. Nominally, Mr. Kendrick can be taxed, and nominally everyone else is better off. However, Mr. Kendrick cannot be taxed of real resources, because he basically doesn't produce any, so nobody is really any better off. Good.

More generally, (really) only production can be taxed: All taxation is a transfer of production, goods and services, to the government. Consumption cannot (really) be taxed, since it is still a transfer of what is produced away from the consumer and to the government, which then consumes. Consumption can only nominally be taxed. For example, were we to tax Mr. Kendrick to such degree as to change his behavior, on the whole, there would still be no net improvement in the economy. Any real improvement in the rest of the world would be less than Mr. Kendrick's loss.

Further, (really) only consumption, demand, can be subsidized: All subsidy is a transfer of demand, that is, consumption of goods and services, from one producer to another, through the instrumentality of the government. Due to handling expenses, the subsidy is always less than corresponding tax, that is, on the whole, an economy is always, in the present, worse off for a subsidy. This is not to say a nominal subsidy need be useless. For example, when the subsidy goes to develop infrastructure, that is future production, an economy may be better off in the future.

Above xposted to:
http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/#more-5896

To continue: An economy is a transfer of production to consumption, of producer to consumer. However, producers are also consumers, and must get back a certain percentage of their real production in order to survive and expand. The various mechanisms of an economy may prevent producers retaining this percentage, in which case, a nominal subsidy may be necessary to compensate. This combination of processes is, however, less efficient than just letting producers retain sufficient resources on their own account. For instance, labor, particularly low wage labor, is increasingly coming under subsidy, as eg earned income tax credit, and in the future, ‘universal health care.’ It is more efficient simply to arrange that they are paid more. However, this seems to be politically infeasible.

From the above, it should be clear that the real, or essential, tax base is much smaller than the nominal, or apparent, tax base. This is because most labor, and most industry are involved in activities which are essentially non-productive, in the most basic sense. The financial services sector, for instance, cannot really be taxed, because it produces nothing real. Government employees, for instance, cannot really be taxed. Neither can Calvin Klein or Brad Pitt. Or your neighborhood plumber. Unless the government directly uses their services, their production, and is not buying these services, the government is merely transferring other, more basic production, away from them and to itself. They are not part of its real tax base, however much a part of its nominal tax base they may be. The government, for instance, cannot really tax the military industrial complex. It can, and must, tax those industries whose production goes into sustaining that complex. The production of steel and coal and electricity can be taxed, but the production of a jet fighter engine cannot be. The engine is instead really paid for by the steel and coal and electricity and labor, and whatever else goes into it, that the government had collected as real tax. This is clear because what ever nominal taxes are charged to the jet engine will merely be added to the (nominal) bill the government pays for it.

So, are you really taxed, that is do you directly contribute to your government, or are you just nominally taxed, and your welfare reduced somewhat by the transfer of demand, and thus resources, away from you? Probably (mostly, if not all) the latter.

Thus your complaint is not that the government takes too much from you, since it takes nothing. It is merely that it does not allow you to keep for yourself as much of what others have produced as you would like.

--- Further consideration has led me to the conclusion that real assets can be taxed, since all real assets have previously been 'produced.' Thus, taxes on Mr. Kendrick's nominal wealth, which represents a demand on real wealth, would represent a real transfer of wealth from Mr. Kendrick to the government. However, Mr. Landsburg's point that the government spending this would leave everyone else a little worse off is still correct. But so too if Mr. Kendrick had just taken the money and spent it himself.

A point of MMT, however, if I have it correct, is that the purpose of taxes is not to raise revenue. The government can spend its currency as it wishes. (Nominal) taxes are to maintain a demand for that currency, and to destroy excess demand in that currency, that is, to maintain the value of that currency, ie fight inflation. According to MMT, then, the real cause of inflation is a lack of political will. ---