Thursday, November 18, 2010

The Necessary Impact of Taxes

Menzie Chinn does a good Job of model analysis of the potential effects of a Tax increase. What he is basically saying states that there is not necessarily an efficiency gain from reduced Taxes. Upper Income Earners work approximately just as much under higher taxation as lower taxation. He does not scope the increased efficiency of Employee training which derives by higher Income Earners wanting more Time off, which I would imagine is inverse to the Tax rate, and at far greater extreme elasticity. The 4% replacement of Tax revenues coming from maintenance of the current Tax platform should lead intelligent people to assume that We cannot really afford to retain the low Tax rates.

We can now turn to David Leonhardt’s article. The Bush Tax Cuts initially seem actually to suppress the rate of economic growth. Renewal of these Tax Cuts show no indication that there would be an improvement. The one effect I do define positively to occur is the Government providing Business a place to invest their financial Profits safely; I am talking about the vast increase in the federal debt which was only lately reduced to low Profit yields. I hold to the thesis that Business will not adopt high-Risk ventures, if there is alternate lower-Profit investment opportunity, even if the Profits are much lower. It is all about being able to invest outside your initial venture areas while knowing little about the development strategies of other sectors. I wish Menzie Chinn would set up a model examining the elasticity of such investment based upon both the rate of Return, and the degree of Risk.

My precis would claim that Business personnel are as cautious at reaching outside of their area of expertise as any ordinary set of people. What pushes them out of their own sectors is over-development of their own sectors to the point they do not want further development at their own Risk, and lack of other safe investment arenas. It may not be clear to the Reader, but it is to me, that financial Profits must be re-introduced into the Production function at some point; and it is often where those Profits were not earned initially. Efforts must be made to minimize the cushion of Risk-free investments, and the best way to do eliminate such hedges remain Taxation. lgl

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