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Example 2: Since in every economy in the world, the wealthy spend a lesser portion of their income, which is exactly the reason why they have the ability to invest some of their money, you can boost the economy by taking some of the money investors would have saved and give it to people who are really poor, and spend 100% of their money. So let’s say Johnny from the previous example earns $1 million per year and Jackie earns $10,000 per year. Jackie just barely getting by. She live in New York City, so rent in a shared apartment is $9,000 per year ($700 per month) and transportation is $1248 per year ($104 per month) and she receives food stamps for food. She’s is short $248. We know that if the government doesn’t find a way to support her, she will be homeless… or worse. If the government can balance its budget with 25% of Johnny’s income, which is $250,000, and Johnny only spends $500,000 this past year, he’ll save $250,000. But let’s increase Johnny’s tax by 1%. Johnny wasn’t going to spend it anyway. As a matter of fact, he was going to use that 1%, or $10,000, to invest in OTI, Old Technology Incorporated, a company that makes steam engines for cars, something that has almost no demand, so the company was going to use Johnny’s money to pay off its debt, which would then go into a bank and the bank would have to find some other company like OTI to lend to, in part because all of the good companies already have enough money. But with the tax increase, the 1% of Johnny’s money comes out to be $10,000 and if we gave it to Jackie, she now has enough money to pay for the rest of her transportation cost to get to her work, and it’ll give her over $9,000 to spend on electricity ($600) heat during the winter ($500), air conditioning during the summer ($500), an inexpensive cellphone with service ($400), a winter coat ($100), replace the shoes she’s had for the past year ($50), tooth brush and tooth paste ($50), soap ($50), toilet paper ($100), visit her mother for Christmas with ham, bread and fruit ($100), pay for the extra train ticket to New Jersey for a job interview ($4), a suit for the interview ($100), no more food stamps because of the extra $10,000 ($2,400)… so far Jackie has spent about $5,000 just on necessities. She still doesn’t have internet at home. She doesn’t have internet on her phone. She doesn’t have television services. She doesn’t have a radio. She doesn’t have a cool leather jacket. She hasn’t bought any alcohol. She hasn’t gone out to eat, actually. She hasn’t been out clubbing. She’s not spent any money on evening college courses. By giving poor people like Jackie some money that wasn’t going to be spent by wealthy people, we’ve already created 50% more economic activity from Jackie demographic… all without being extravagant. No presents, no toys or anything like that.
With this extra demand created, we companies will now have to make and deliver the products and services Jackie needs with that extra money. That’s how you create jobs.
In my previous entry, I discussed how giving tax breaks to investors will lead to an inflation of equities on the stock market. It does not lead to job creation.
Demand creates jobs.
One way governments think about increasing demand is to take money away from people who spend a smaller percent of their income and give it to the people who spend a greater percent of their income.
Example 1: In a hypothetical economy of 300 million people, we have Johnny and Jackie. they both each earn $100,000 per year. Johnny spends 50% of his pretax income and Jackie spends 75% of her pretax income. At the end of the year, Johnny has $50,000 and Jackie has $25,000. Instead of taxing them both at the same 25% tax rate, Johnny is taxed at 35%. So, after tax, Johnny has $15,000 and Jackie has $0. Since this particular government I’ve created has a balanced budget, it has an extra $10,000. If the government wants to boost the economy some more, it would give that money to Jackie, who may or may not spend part or all of that $10,000. Even if she only spends $1 of the $10,000, this economy received an extra $1. This is one way to boost the economy: tax savings to encourage spending.
I am not interested in raising taxes. However, let’s get one thing straight: Entrepreneurs and investors do not create jobs.
Demand creates jobs.
Giving more to investors gives them more money to invest. That’s true. So, let’s say we give wealthy investors money they can invest into companies. Fine. Wealthy investors now have more money and it creates more demand for equities of companies, there by increasing the price of shares on the stock exchange. That money goes to companies. And what are companies going to do with that money? Hire more people? They could hire more people but why would companies hire more people with that money?
Companies hire more people because there is a greater demand for their products and services. (This assumes that companies have competent managers.)
Economics of running metropolitan areas is among the most difficult. It is a combination of microeconomics and macroeconomics. Even when a city is small, macroeconomic policies play a huge role in the development of that city. New York City is particularly difficult because there isn’t much room for mistakes on multiple fronts: the whole world will see its mistakes, making a difference takes incredible amount of money, world most powerful people do business in New York City and want to keep doing things their way… too many to list all of the reasons.
Technology is one of the few ways a city can actively compete in the world. I think Mayor Michael Bloomberg is doing the right thing to try to promote technologically sound entrepreneurship to the city. He should promote the use of one of a few tools a city has to better itself.
"Supporters of the double tax suggestion that the benefits from its repeal would flow disproportionately to the wealthy. (The Urban Institute - Brookings institution Tax Policy Center estimates that more than one-half - 53% - of the benefits from the reduced tax rate on dividends go to the 0.2% of household with incomes over $1 million.)"
South-western Federal Taxation 2011 by Willis, Hoffman, Maloney, Raabe, Young
It’s tax season and I have income tax on my mind. Not that being a being poor student requires me to pay a lot of taxes. But Adam Smith, arguably the father of modern economics, states that for taxes to be equitable, they must meet certain requirements, one of which is for it to be relatively easy to figure out how must one needs to pay so that there isn’t undue economic burden, in terms of money or time, to pay the tax.
Adam Smith also doesn’t consider taxes to be a punishment, like many Americans seem to believe. The government provides various services which in aggregate create an economic system. This resulting economic system is the government’s product. Those who benefit the greatest from this economic system should pay for the greatest portion. Many Americans believe that since the government provides poorer people more services, richer people shouldn’t have to pay so much. But this would not be equitable since no one is paying for individual government services.
So, with this in mind, how should income taxes be calculated?
I’ll be doing a vlog about this in the near future but wanted to briefly introduce it ahead of time so people can think about it: There are inconsistencies everywhere, so why wouldn’t there be at least one in the US Tax Law?
The IRS has a very practical and sensible way of figuring out whether a person is a contract worker or an employee. There is a rule, and the courts have back them up, on this: if you look like and employee and if you walk like an employee and if you talk like and employee, you are an employee.
Assumption here is
