Phil Hauck's TEC Blog

Sunday, September 18, 2016

What's Mistaken ... In The Campaign Debates

A number of topics aren’t being adequately dealt with in the current presidential campaign, or are being maligned when they shouldn’t be.  They are:
•  Business Income Taxes
•  “Trickle Down” Economics
•  Global Free Trade
•  Minimum Wage

For starters, can you agree with this premise:  Every dollar used by every government entity (municipalities, counties, states and schools) comes from the profitability of privately-owned companies … either by taxing the profits of the companies themselves, or the earnings of their suppliers and employees?  And:  Their profitability over time comes from their innovation in developing and marketing new products and services that consumers are willing to pay for.
If so …

Business Income Taxes
Make them Zero.  Forget the discussions about moving them to 25% or 20% or 10%.
What do businesses do with their retained earnings?  They invest them … in expansion, in new product development and testing, in stuff that will create more jobs and more profits.  They are the Golden Goose.  Why take money from them?  (Of course, they should continue to pay usage taxes for government services they get.)  
Capital Gains:  Eliminate it.  Make it ordinary income ... with a carve-out for demonstrable direct investments as new money in companies.  Yes, there are winners and losers for all those special deductions; eliminate them.  Simplify.
Regulations:  Simplify and reduce regulations.  This is actually the Biggie!  Every regulation has losers, winners and the cost of administration.  The winners keep lobbying the bureaucrats and legislators to maintain the regulation from which they benefit.  In a real sense, this is increasing corruption as the rewards get bigger.  Reducing regulations reduces the corruption that increases and eventually stultifies capitalism/free enterprise.  It’s happening as we speak.
This will put a stop to the Corporate Inversion trend, and immediately repatriate much of the massive dollars held overseas.  (Keep in mind that opportunities for investment returns overseas are actually greater than in the U.S.)
But won’t those rich owners just make more money?  Yes.  When they take the dollars out of the business as personal income, we tax it … already at very progressive rates.  We’ll get even more than we do now with the same rate structure.

“Trickle Down” Economics
It’s a bad thing, right?  It’s wealthy rich businesspeople allowing some of the corporate largesse to trickle down to employees and the middle class, right?
WRONG!  Massively WRONG!  So-called “Trickle Down” Economics is the core of the capitalistic system, that which yields lower prices that stimulate more spending and an increasing economy.  It’s GOOD!  It’s simple.  Here’s how it works …
When a business sees purchases of its products strengthening, it invests in expansion … another building and more equipment.  That provides one-time construction and manufacturing jobs … and ongoing jobs to run the new plant.
This increases the Supply of the product … which immediately yields lower prices to encourage more Demand.  Lower prices create spending by people on the margin who couldn’t afford the earlier price.  This spending now is increased Demand, which provides more margin dollars for the business to pay off the investment and make more money for its employees, suppliers  and the business, which invests it in new product development and testing.  As it sees new demand for its new products, the business invests in building expansion and new equipment …
The circle continues.
So, “Trickle Down” means that prudent, successful investment yields additional margin dollars which will go to current and new employees, and their families.  That’s how it works.  That’s why “Trickle Down” Economics is very, very important.

Global Free Trade
During the campaigns, there is much revulsion in the media and by the candidates against global trade agreements, and even an expression of denial of them in the Republican platform.  Donald Trump refers to them as “deals,” which they surely are … but they have to be “win/win.”
We vilify the Clinton-era NAFTA one, and want to pull back from the current, agreed-upon Trans-Pacific Trade agreement.
This despite 73% of the U.S. citizenry feeling that free trade agreements like these are good for us.
Indeed they are, and they are KEY to U.S. economic growth … and the economic growth of every trading partner.
We have to be doing them.  (Part of the understanding relates to the economic principle of Comparative Advantage.)
And here’s why!

Think of your city, or county, or section of the state.
Everyone has a particular income level.   When Product A is made in your area, and sold to you in a local store (so the economic relationships are entirely within your area), your income is reduced by the price of the product, and the revenues of the retailer and manufacturer and their employees and suppliers increase by that amount.  (To the degree there is some profit, say 5% after tax, that accrues to the owner of the store and the factory.  That 5% typically is held in the company for reinvestment in new ideas or expansion.)
Yes, the buyer gets something of value … and the workers and raw material makers get most of the money … but there is virtually no increase in the economic worth of the area.  No increase in the net worth of the people of the area.  Overall prosperity typically has not increased.  Making and selling to yourselves doesn’t increase economic net worth.
So, what does?
What does is revenue from buyers OUTSIDE your  area, your city, region, state … or COUNTRY.  THEIR savings are depleted by the cost of the product, not ours.  We get the revenue from these additional sales … INCLUDING our workers and raw material makers getting their portion.  SO, net gain in our savings, and net worth, occurs when we sell to people OUTSIDE OUR AREA!

So, what about all of these companies that close manufacturing facilities in our country and open ones in other countries because it’s “cheaper”?  They are doing it because it IS cheaper.  It keeps their costs lower than competitors, allowing US to continue to pay less … and them to sell more … thus increasing the return (revenue stream) to their owners.
Yes, but our workers lost their jobs!!  What about that?
It’s the economic law of COMPARATIVE ADVANTAGE.  The foreign location has an ADVANTAGE over us … and should obtain business for it.  It’s what we try to do as well.  It’s not bad.  It’s actually good.  But, not for our workers who lost their jobs.
So what to do?  It’s a role for government!  These workers need to be re-trained for jobs that DO EXIST and are increasing in demand, and potentially moved to locations where those jobs exist.  That’s the role that community technical colleges are playing … but moving expenses aren’t being dealt with.
We need to be doing both in this increasing dynamic and chaotic international economy.

Minimum Wage
Creation of the Minimum Wage is a distortion of free market capitalism, as are all regulations.  Obviously, we need many regulations, to protect us from shoddy work and fraud.  The key is to keep them reasonable while yielding a dynamic economy and an ability of each family to use its ingenuity to advance its welfare.
The Minimum Wage is something else again.  It’s an assumption by legislators that people deserve a certain level of income (regardless of the market value of their labor), and the employer should pay it.  This flies in the face of competitive marketplaces, where each business tries to find its special niche that can yield it a profit that allows the business to continue.  Often, the price of the talent needed for certain job functions is quite low … driven by supply being very high relative to demand.
Certainly, our American society is devoted to providing a relative level of services that takes care of the needs of each citizen.  We see it in unemployment income, food stamps, housing allowances, Medicaid, winter energy price freezes, and more.  Above that, we give generously to non-profits who provide many other needed services.
But the Minimum Wage is a technique fraught with negatives, that have been hashed and re-hashed.  If nothing else, it forces employers to increase cash compensation, which leaves fewer dollars for other benefits or reinvestment.
The point is:  If the American people, or the people in each state, or each county, want to provide a minimum amount of services and income to families and individuals, then they should decide how much, and how … and provide it through the general tax system.  NOT through an arbitrary, one-size-fits-all Federal Minimum Wage to be paid by a business in a competitive environment.
There is a mechanism already in place that helps with some of this, but not all:  The Earned Income Tax Credit.  It forgives taxes for low income workers, and could even provide them a “refundable tax credit” (i.e., an extra cash payment).
We should not be so anxious to impose higher and higher Minimum Wages arbitrarily on businesses.

To stimulate thinking!
Thanks for listening!

To think about regarding the election:
•  What direction do you wish the size of government to go?  To where it is responsible for taking care of all citizens … or where it is responsible for providing certain services enumerated in the Constitution or unable to be provided economically by the free market system?
•  How are we doing in managing the national debt?
•  Caveat:  The above is, obviously, simplified and isn’t a pros-and-cons white paper, so much is left out.  But I hope the essential points resonate.

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