23 April 2008

The Them is Us - Why Lower Taxes Might Not Increase Incomes

Recently, I have talked to a doctor and a lawyer (I look forward to the unscheduled but surely inevitable chat with the Indian chief). Both have made politics simple: for them, they typically vote Republican because they dislike paying so much in taxes. What could be more obvious or simple?

These people work hard and aren't eager to give their money away. But that is just half the equation. Doctors and lawyers make more than the average person in probably every country. Relatively speaking, they will always be "rich." But the amount of money they make is always proportional to the average income in their community. Poor people can afford to pay them less than wealthy people.

Because of this, doctors and lawyers - even corporate chiefs - have an interest in the well being of others. For this reason alone, they ought to concern themselves with policies beyond simple measures like tax rates.

First of all, lowering taxes while increasing spending is a ruse. It is like paying less on your credit card while spending just as much each month. The ultimate cost is higher than "pay as you go" options.

Secondly, it is possible to spend money in ways that increase GDP. Not all money is a simple transfer of income. (And while I don't think that subsidizing the poor needs an argument to support it, I'll not even bother to make that argument right now.) Government spending can make an economy more robust: public education, transportation systems, R&D, and regulations are just some of the more obvious ways that a community can create value for everyone. It is worth remembering that Sweden's total tax rate is 50.5% and Mexico's is only 18%. Low taxes do not automatically translate into high incomes any more than high taxes automatically translate into low quality of life.

Most religions preach some variation on the notion that "the other" is an illusion imposed by our limited consciousness. "As you do to the least, so you do it unto me," suggests that the distinction between least to greatest is illusion. Given how communities share so much - from crime rates to average incomes and culture - it may well be that the illusion of "the other" applies in every area - even economic policy.

As it turns out, even the best doctors and lawyers find it difficult to live well when their patients and clients are unable to pay their bills. It might just be that the them is us.


Suzanne said...

Hi Ron,

I would like to suggest that the issue isn't lowering taxes, but whether or not the next president will maintain the current tax rates.
For instance, will the next president maintain the current capital gains tax rate? I believe the lower rate encourages investment.

I do not dispute the need for more goverment spending for schools, infrastructure, etc. I just wish that we had a better way to account for the efficacy of gov.t spending in these areas.

I'd also like to see a more serious study of a flat tax rate.


cce said...

Hmmm, I'm puzzled. I've always thought that doctors and lawyers fall on opposite sides of the tort reform issue and therefore vote differently, (i.e, most doctor's Republican, most lawyers Democrat). Now you've blown up my worldview, Ron.

David said...

Depends on who the poor are. But that's another argument as you say. Yes, government spending can increase GDP and create value provided it is spent correctly and administered effectively. Most proposals made by the candidates involve using the current bureaucracies and thus promise greater spending with even fewer positive results. You're correct Suzanne. No one is addressing this issue and I contend no one can.

nunya said...

Well, a low tax rate in Mexico happens to be fabulous for the number three on Forbes billionaires list . Inherited the $ of course.

LSD said...

The them is us? Wait, what are you saying? Are we the ones we have been waiting for? Maybe it's that we have found the enemy and he is us...

HRH said...

This is a very difficult situation from all angles. One of the problems medicine is in is that it is not anything close to a free market where the best doctor gets the business. Or that the best doctor can charge what he/she is worth. Or that the patient can choose the best doctor. Or the patient can pay any doctor. You might have figured out by now that this is a hot topic at my house. UGH. I really haven't a clue what the solution is. The whole tax thing of course only is a problem once the income comes in. At this point the income has to come from somewhere.