Because that's what drives the creation of wealth and economic growth

Above all else, tax reform is about the productive deployment of capital

By —— Bio and Archives--October 23, 2017

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Why do conservatives want lower taxes? Is it because we hate government, hate the poor and hate the environment?


Is it because we think fat cats need to be fatter?


Concept of capital

Is it because we’re selfish and don’t want to “pay our fair share” to support the greater good? No, and there’s so much wrong with the premise of that question, it’s a good place for us to start exploring the real reason.

Many people - and just about all the news media - consider it a given that money paid in taxes goes to provide for the “greater good.” They think the money spent in pursuit of revenue and profits is purely for the personal benefit of those involved in the transactions, whereas the money spent by government benefits us all. For that reason, they believe that when you give up money you’ve earned so government can use it, it’s a clear-cut case your sacrificing for the sake of something that makes everyone better off.

There’s one problem: That’s not true. And the fact that so many people think it is true suggests that have a serious problem when it comes to economic literacy. People don’t understand the nature of markets. They don’t understand the concept of wealth creation. They hear about concepts like economic growth in terms of percentage gains or losses, but they don’t really know what that means.

So let’s start with the concept of capital.

A dollar you’ve earned is capital you control. You can do whatever you want with it. You can invest it in a business. You can buy a pack of gum. You can simply put it in a savings account. You can buy a lottery ticket. You can give it away. Every dollar floating around is like that. Someone earned it and someone controls it, and will decide how it’s used.

Dollars that remain in the private sector are far more productive than those sucked up by the public sector and spent by politicians

Then there are the dollars you earn that the government takes from you. You will not decide how that dollar is spent. Politicians and bureaucrats will decide that.

When considering tax policy, we have to ask ourselves this: Which set of dollars is deployed more productively? The dollars people earn and retain control of? Or the dollars taken by government?

I’ll cut to the chase: It’s not close. Dollars that remain in the private sector are far more productive than those sucked up by the public sector and spent by politicians. This is not to say there’s nothing government does that’s necessary or useful, or that there’s no justification for them taking any money in taxes. That’s not what I believe. But what I do believe is the money deployed by government, while often necessary, almost never contributes to the creation of any real wealth. It can help maintain the circumstances that permit private capital to create wealth, but the fact remains that private capital has to do it.

That’s why liberals are wrong to think capital left in the private sector isn’t for the “greater good.” It is. Capital in the private sector funds product development, technology development, new service concepts and better ways for people to get their needs met. Transactions between businesses, or between a business and a consumer, result in both all parties to these transactions getting the things they need or want.

The people who earn salaries paid by private capital not only contribute to this productivity, but they also help to make more of it possible by turning around and spending the money they earn on things they want or need.

So why do conservatives want taxes lowered? Because lower tax rates and a simpler code accomplish two important things: 1. They make more capital available for the productive sector of the economy, which is the private sector; 2. They eliminate the government-driven manipulation of behavior.

Continued below...

The Trump tax reform plan doubles the standard personal deduction for everyone

Let me explain number 2 further. When the tax code offers you deductions on things like mortgage interest, or the use of certain kinds of fuels or equipment, it’s manipulating you to buy a home or use those certain kinds of fuels or equipment. And it’s punishing you if you don’t. The problem with that is that you know your needs, not them. Maybe you don’t need to own a home or buy that piece of equipment. Maybe you don’t want to use that kind of fuel. There’s no reason the IRS should treat you differently than other people because you did or didn’t do these things.

The Trump tax reform plan doubles the standard personal deduction for everyone - which means you have to earn more money before it starts to be taxable - and it eliminates some of the special deductions in the existing code. That means it treats everyone the same. For example, the plan doubles the standard deduction for married couples from $12,000 to $24,000, but proposes to eliminate the deductability of state and local taxes. Is that a tax increase on you? Unless you pay $12,000 or more in local taxes, no, it’s a tax cut. And the code now treats all married couples the same regardless of the tax rates of their state.

That’s what we need from the tax code. We need everyone paying on the same model

That’s what we need from the tax code. We need everyone paying on the same model, without giving some people breaks for certain things while other people don’t get those breaks because they fall into different categories, or do different things. And we need more capital left in the private sector to be spent and invested. That will create wealth and spur much faster economic growth than the paltry 1.9 percent per year we saw under Barack Obama.

A recent Wall Street Journal article says the Trump tax plan will reduce federal taxes on investment from 34.6 percent to 18.6 percent. A liberal will lament that the government won’t get that money. But if you understand wealth creation and markets, you know that extra capital will be invested in far more productive things than whatever the politicians would have done with it. People will benefit more - in terms of higher-valued goods and services and more job creation - than you would ever see as a result of government spending of that money.

I might even suggest that it would help create enough wealth that the government would eventually get its money back anyway, but that’s not my concern. The greater good is accomplished by the productive use of capital in the private sector. The less we let the government take from us in taxes, the more wealth the private sector can create.

That, above all else, should drive the tax reform debate.

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