Thursday, October 28, 2010

Avoiding Taxes

A "moderate" friend recently sent an e-mail to me and some of our mutual friends, and I felt like the answer should have a wider audience and discussion, so I'm putting it here. He asked:
Remember how we had a conversation a few weeks ago about taxes? Can my conservative friends help me understand why something like this is NOT a bad thing?

I don't want to raise taxes, I just don't think that having a tax code that allows you to dodge them in this way (provided you're a corporation and have enough money to do so) is something that should be tolerated. However, any attempt to close this "loophole" (or whatever you want to call it) is attacked as "They want to raise taxes!!!!!".
Google is saving money. Let me assure you that they don’t have a secret cave in the hills of Nevada filled with millions of mattresses stuffed to overflowing with $20 bills. They’re going to do something with it. That something will involve buying things or hiring people. If you make things or want a job, or provide services for people who make things or have jobs, then you might be happy to know that there’s more of that going on. Cash sitting in a vault does not equal an economy. An economy consists of money moving. Kind of like electrons sitting in atoms are fine and dandy, but when they start moving around, then you’ve got power happening. People generally want money to move. They want it to move into their wallet as fast as possible, but they also want it to move out of their wallet and be replaced by a nice big flat-screen in their living room. Money moves in three ways: first, by freely executed exchanges. This generally makes up the bulk of an economy, and in a micro scale consists of a bidirectional flow where money flows in one direction while value flows in the other. The money is neither created nor destroyed, but by its movement creates value. On a macro scale, this appears as a turbulent flow of money that generates a steady stream of value. The second manner in which money moves is by individual forcible action, such as theft, extortion, fraud, etc. In these cases, money still moves, but in the process of doing so generates no value. If a guy mugs me, he gets my money, but I don’t get to demand a flat-screen in return (or if I do demand it, I’m likely to be disappointed. Also shot). The third way is through taxation, which in economic terms is indistinguishable from theft, extortion, or fraud in that money moves, but no value is created. (there are actually some sub-categories of taxation, for instance fiat currency can be created out of nothingness, or time-shifted taxation in the form of bonds can be used to divert money from useful endeavors into zero-value transactions, but they all fall under the same umbrella concept of moving money without creating anything useful)

Closing these loopholes is all well and good, but if that’s all you do, then you’re taking money that could be creating value and stopping it from doing so. So yes, it is “raising taxes”. Any work to close loopholes such as this needs to be balanced with work on lowering other taxation. Or, more importantly, with lowering government spending, no matter what you do with taxes. (actually, it is possible to go too far with this. If you reduce spending below the level of taxation, you end up with a surplus, which is fine and dandy while you have a national debt, but once that debt is paid, the surplus equates to money coming out of circulation, which causes deflation of the currency, which is bad in its own ways. Much as I generally dislike inflating the monetary supply, it is useful in some ways. It discourages the hoarding of cash, thus encouraging a higher velocity of money, and it lets employers lower functional wages for unproductive employees without having the psychological burden of actually enacting a pay cut. The one nice thing about a fiat currency is that it gives you precise control of inflation. The down side is that you aren’t forced to exercise that control, and can let it run rampant, the Weimar Republic being the poster child of exactly that problem)

It’s also a great object lesson in how lowering taxes can raise revenue. Here’s a huge chunk of tax revenue that would stay in the US if the US taxes were low enough that it would be unprofitable to export that money elsewhere.

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