Greece is cutting their Goods and Service Tax (GST) to replace the Lost Economic Activity the High GST Caused

Posted by PITHOCRATES - August 3rd, 2013

Week in Review

There are few things more enjoyable than going out to a nice restaurant.  Where you and your significant other can enjoy a fine meal.  And some adult beverages.  A couple of cocktails each before dinner.  A couple of glasses of wine each with dinner.  Then dessert and coffee after dinner.  It doesn’t get better than this.  But it can get costly.  Especially when there is a 23% GST (see Greece slashes restaurant taxes by Alanna Petroff posted 8/2/2013 on CNNMoney).

This week, the Greek government slashed the restaurant sales tax on food and drink across the country, making it cheaper for everyone to go out and grab a meal.

The restaurant sales tax, which was 23%, has been cut down to 13%…

It’s expected that the break will cost the government €100 million in lost tax revenue in the short term, but will ultimately benefit the country in the long run as it boosts tourism spending and encourages restaurant owners to declare more of their revenue to the government.

They acknowledge that a high GST tax (goods and service tax) rate discourages people from going out.  But the notion that cutting a tax rate will cost the government is a foolish Keynesian notion that must be done away with.  For example, let’s look at the numbers for the above noted dinner out.  If each entree is €8, each cocktail/glass of wine is €5, each dessert is €5 and each coffee is €2 the total for a dinner out is €70.  Add in the 23% GST (€16.10) brings the total up to €86.10.  That’s a lot of money.  So let’s say we can only do this twice a week.

The best part of going out is relaxing over adult beverages.  Which is often the largest part of the bill.  In our example, we drink a total of 16 adult beverages in those two dinner outs (and walk home/back to the hotel or take a taxi as we shouldn’t drive anywhere after enjoying 4 adult beverages during a meal).  Our total GST comes to €32.20.  Equivalent to the cost of 6.4 adult beverages.  In other words, the GST makes us pay for 6.4 adult beverages that we’re not allowed to drink.  So our 2 nights out we pay for 22.4 adult beverages but can only drink 16 of them.  If we went out 4 nights a week we’d pay for 44.9 adult beverages but could only drink 32 of them.  Or drink about 71.3% of what we paid for.  Which would limit our evenings out.  Now let’s look at what happens when the GST is only 13%.

The GST for our 2 nights out only costs us 3.6 adult beverages.  Not 6.4.  Which isn’t too bad.  So we are more willing to eat out.  If we go out 4 nights a week that GST now only costs us 7.3 adult beverages.  In other words, we pay for 39.3 adult beverages while getting to drink 32 of them.  Or about 82%.  Which would encourage us to go out more than before.

So with the high GST rate we may go out only twice a week and pay €32.2 in GST taxes.  But at the lower GST rate we may go out 4 times a week and pay €36.40 in GST taxes.  A 4.2% increase.  And because the lower tax rate is getting people to go out the restaurant owner doesn’t have to cheat the government out of the tax to get people into the restaurant.  If the tax rate is reasonable people will pay it and the owner will pass it on to the government.

This is something Keynesians don’t understand.  They see only loss tax revenue with a cut in tax rates.  Not the additional economic activity those lower tax rates will generate.  Which is why Keynesians have horrible economic records.  Like President Obama.  And the Eurozone nations.  While people who understand classical economics have good economic records.  Like Ronald Reagan.  And Margaret Thatcher.

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Big Box Stores going after Mom and Pop Stores again, this time on the Internet

Posted by PITHOCRATES - May 12th, 2013

Week in Review

The big box stores put Mom & Pop stores out of business everywhere.  Mom and Pop cried foul.  But the big box stores told them to cry them a river.  This is business.  If you want to play with the big boys then you have to figure out how to stay in business selling at the big boys’ prices.  Which Mom and Pop never could do.  Not with the big box stores’ purchasing power.  And their big box stores and warehouses that can house massive inventories.  When Mom and Pop could only buy a handful of stuff at a time.  Quantities so small they got the worse pricing from their suppliers.  Who could care less if they stopped buying from them.  Because it was the big box stores that kept the suppliers in business.

So the big box stores had a mighty advantage over Mom and Pop.  Some would even say it was unfair.  Even causing people to protest the opening of another big box store in their neighborhoods.  To protect the Mom and Pop stores.  For the people knew the moment a better deal was available they’d leave Mom and Pop and flock to the big box stores.  Where they could get real value for their hard-earned money.  And now the shoe is on the other foot.  And Mom and Pop have found a way to beat the big box stores.  Who are now crying foul (see You’re probably a tax cheat! Even if online stores don’t charge it, you’re supposed to pay it and new law will try to force you by AP Reporter posted 5/5/2013 on the Daily Mail).

Few taxpayers know they’re expected to pay sales tax on online purchases, so a new law likely to pass in Congress Monday will help states force retailers to pay up, thus forcing the retailer to charge its customers tax…

Supporters say the bill is about fairness for local businesses that already collect sales taxes, and lost revenue for states…

Supporters say the bill makes it relatively easy for Internet retailers to comply. States must provide free computer software to help retailers calculate sales taxes, based on where shoppers live. States also must establish a single entity to receive Internet sales tax revenue, so retailers don’t have to send them to individual counties or cities…

‘Complying and living under the tax laws of 50 states is a major undertaking because the process of complying with tax law goes far beyond just filling out the right forms,’ said Brian Bieron, eBay’s senior director of global public policy. ‘You have to deal with the fact that all of these government agencies can audit you and can question you and can actually take you into court and sue you if they think you are doing something wrong.’

Not charging sales tax does not give Mom and Pop an advantage over the big box stores.  It’s not having a brick and mortar store that gives them the advantage.  And not much of a one at that.  For unlike the big box stores everything Mom and Pop sell over the Internet includes something the big box stores don’t.  Postage and handling.  Which can be greater than the sales tax the big box stores adds to their sales.

As far as lost tax revenue for the states?  It is not as bad as they claim.  For instead of sales tax cities and states are generating fuel taxes on the fuel the delivery trucks consume.  They’re generating payroll and income taxes from the delivery truck drivers, the package sorters, the mechanics keeping the trucks on the road, etc.  In addition to the taxes these workers pay they spend what they keep.  Spending it in the local economy.  Where they even take their wages into those big box stores.  Purchase something.  And pay sales tax.

This is real economic activity that Internet sales drive.  Which DOES create a lot of tax revenue in these states.  So this isn’t as much about an unfair tax advantage Internet retailers are getting away with.  It’s about the big box stores who just don’t like the shoe being on the other foot.  So they hope to destroy that competition by putting Mom and Pop under an additional 49 (or more when adding in cities and counties that charge sales tax) tax jurisdictions.  Which will just suck the life out of dear Mom and Pop.  Again.

And it’s a chance for government to suck more wealth out of the private sector to pay for their bloated public sector.  Who are drowning under the weight of their costly public sector union contracts that they will grab any tax they can.  Leaving the taxpayers with less money in their pockets.  Which is why they turned to the Internet in the first place.  To get as much value as they can from their rapidly shrinking paychecks.

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FT123: “It takes both a tax rate and economic activity to generate tax revenue.” – Old Pithy

Posted by PITHOCRATES - June 22nd, 2012

Fundamental Truth

There is an Incredible Amount of Economic Activity behind a 20-Ounce Bottle of Soda Pop 

Have you ever considered all of the economic activity that had to happen before you could buy a cold 20-ounce bottle of soda pop from a convenience store?  First of all, building that convenience store itself required a lot of building supplies.  And construction workers to build it.  People in factories hired people and bought materials to build the food equipment, coffee equipment and coolers.  The people utilities hire make sure the store has access to electric power, gas, water, sewage, telephone and Internet access.  Transportation companies deliver food and merchandise to the store.  Who buy trucks and vans from dealerships who buy them from automotive manufacturers.  They hire drivers for their vehicles and workers for their warehouses.  They buy fuel for their vehicles.  Refineries provide the fuel and they hire people and buy petroleum oil.   Which provides more jobs in the pipeline, railroad, trucking, shipping and oil drilling industries.  Who all hire people and buy things built by other people.

The food and merchandise came from plants that hire people and buy material.  The one brand of soda pop you purchase hires many employees and operates one or more bottling plants.  They buy advertising that provides jobs for others.  They buy cans and bottles that come from suppliers who make them out of raw material that still others extract out of the ground.  These suppliers hire even more people and buy even more materials.  There is label or artwork on the cans or bottles that other people are hired somewhere to provide.  Their offices operate with computers and software built, shipped, installed and programmed by others.  They maintain a web presence which creates further jobs.  Their employees use smart phones the company purchased from others who hire people and material to build them.  And hire even more people to maintain and operate the networks.

And the list goes on.  There is an incredible amount of economic activity behind that 20-ounce bottle of soda pop.  In a vast complex of horizontal and vertical business relationships.  Each providing their little part in the big picture that lets us walk conveniently into a convenience store whenever we want and buy a cool and refreshing beverage in a 20-ounce bottle.  Now multiply this for every product in that store.  And for every store in the country.  Millions of people working in millions of jobs earning a paycheck.  And each paycheck deducts payroll taxes.  Such as Social Security, Medicare, state unemployment, federal unemployment and workers’ compensation.  Each check (in most states) deducts federal and state income withholding taxes.  Some cities even deduct a city withholding tax.  Businesses pay taxes on their earnings.  On their personal and real property.  Just as homeowners pay real property taxes on their homes.  And there’s more.

In 1992 the Middle Class paid approximately 40% of their Total Earnings in Taxes

If you look at your cellular bill there are taxes itemized on it.  When you go to the store you pay a sales tax on most purchases other than food.  Some people even pay a city sales tax.  If you buy cigarettes or drink alcoholic beverages you pay an excise tax.  Or sin tax.  They tax the gasoline you buy for your car to pay for the roads we drive on.  If you buy sugar in the store you’re paying a sugar tariff.  If you make a capital gain on your investments you pay a capital gains tax.  And on and on.  Throughout that complex of horizontal and vertical business relationships there are taxes.  Just as consumers pay taxes throughout their ordinary day.  It adds up.  According to CATO, in 1960 the middle class paid about 30% of their total earnings in taxes of every kind at every level.  In 1992 that number rose to 40%.  And is no doubt rising.

Staying with the 1992 number, this means for every dollar you earn you ultimately can only spend 60 cents of that dollar on you.  The other 40 cents goes to some governmental coffer.  Or looking at it in another way say you gross $800 a week.  Your net pay will be less for the taxes you see withheld from your paycheck.  But when you add the other taxes you don’t see you really only get to spend $480 of that $800 you earned.  Or if you gross $41,600 annually you’ll be paying approximately $16,640 in taxes of every kind at every level of government.  In a word – ouch.

Yeah, we all know that we pay a lot in taxes.  Most of us are just resigned to it.  But with all these debt crises (at the city, state, federal and international levels) it does make you think a little more about all those taxes we pay.  And the cries to get the rich to pay their ‘fair share’.  The amount of taxes the rich pay are even worse.  The percentage numbers may be lower if they pay a lower capital gains tax rate on an investment portfolio, but they are paying from hundreds of thousands to hundreds of millions in tax dollars.  Which dwarfs our $16,640.  Yes, they can afford it more than those less rich can.  But that misses an important point.  Tax rates alone do not make tax revenue.  You have to have a prosperous economy, too.

The more People that are Working the more People pay Payroll, Income, Excise and Property Taxes

You cannot tax yourself to economic prosperity.  For if the number of jobs remains the same while we increase tax rates that will only leave businesses and consumers with less money to spend to create economic activity.  And when they spend less in economic exchanges all those taxes we apply to those economic exchanges will generate less tax revenue.  This is why cities, states and national governments have deficits during poor economic times.  Because there is less economic activity to tax.  All you have to do is some simple arithmetic to see why.

Say there is a city with 250,000 working middle class people.  Each earning on average $41,600.  So each contributes $16,640 in taxes at the various levels of government.  Or $4.16 billion in total tax revenue.  Now say a recession comes along.  And the city suffers 10% unemployment.  Putting 25,000 people on the unemployment rolls.  This will reduce that tax revenue down to $3.74 billion.  Or reducing tax revenue at every level by $416 million.  Just about a half billion dollars in lost tax revenue.  All while government benefits increase at every level to cover those 25,000 unemployed.  Add a second city and that could add up to $1 billion in lost tax revenue.  Ten cities could reduce tax revenue at all levels by $5 billion.  Causing deficits at the city, state and federal levels.  It adds up.  And they cannot make up those shortfalls by increasing tax rates.  Because higher taxes reduce economic activity.  Which is what generates those tax revenues.

Now consider the alternative.  Say the government removed some costly regulations for businesses.  Or they repealed Obamacare.  But only removed some costly regulations while leaving tax rates as they are.  This business-friendly environment would encourage businesses to rehire people.  Let’s say they rehire all 25,000 laid-off employees.  If they did they would, of course, restore that lost $416 million in tax revenue.  Without raising tax rates on anyone.  The point being that you can’t generate tax revenue without economic activity.  So any policy that would discourage economic activity would reduce tax revenue.  For the more people that are working the more people pay payroll and income taxes.  The more people that are working the more money consumers will have to spend and pay taxes on their purchases.  And the more people that are working the more houses they will buy which would bring in more property taxes.  Higher tax rates can’t make this happen.  Only economic activity can.

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Japanese Government Spending so High that they are going to Double the National Sales Tax

Posted by PITHOCRATES - January 1st, 2012

Week in Review

And we thought our government debt was high (see Japan PM’s Sales Tax Plan Hits Another Snag by George Nishiyama, Dow Jones Newswires, posted 12/27/2011 on NASDAQ).

Japanese Prime Minister Yoshihiko Noda’s plan to double the sales tax by the middle of the decade suffered another setback Tuesday as lawmakers bolted from his ruling party in protest over the proposed tax hike to 10%.

In addition to opposition from lawmakers, sliding public support is making it difficult for Noda to push ahead with the politically precarious task, but one that is badly needed to address Japan’s debt load, the largest among the world’s rich nations at more than twice economic output…

Noda’s DPJ, which came to power in the summer of 2009, has so far failed to meet many of its promises to slash unnecessary spending, such as cutting the number of lawmakers and the wages of government officials.

Instead, Noda’s Cabinet last week approved funding for the resumption of a dam project, which had come to symbolize unwanted public works and which the DPJ had initially put on hold…

“But we need to watch the issue going forward as if the administration backs down from hiking the consumption tax further, non-Japanese investors may start selling the bonds.”

With domestic investors holding almost all of its government debt, a Greek- style debt crisis is unlikely in Japan. But Tokyo is under increased scrutiny to lessen its debt, and credit rating agencies have threatened to downgrade its rating if Japan fails to proceed with the sales tax hike.

Japan’s debt as a percentage of GDP is over 200%.  America’s is about 100%.  So some think that American debt is not a problem.  However, domestic investors don’t hold almost all of America’s government debt.  The Chinese hold a big chunk of U.S. debt.  So a Greek- style debt crisis is more likely in the United States.  I mean, Standard and Poor’s has already downgraded U.S. sovereign debt.  So we’ve already started down that road.

Worse, those in government have been talking about a consumption tax for years.  Such as the Value Added Tax (VAT).  Which will become a reality if debt approaches Japan’s levels as a percentage of GDP.  And without entitlement reform, it will.

So this is our future.  A 5-10% national sales tax.  Which will hit rich and poor alike.  On top of all our other taxes.  This is the consequence of too much federal spending.  Which answers the question “are there consequences to too much federal spending?”  And the answer is, of course, yes.  Taxes.  More and more taxes.  That is the consequence of too much federal spending.  Because the federal government can only spend what it takes from us.

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FUNDAMENTAL TRUTH #26: “If we need Big Government to protect us from ourselves, then our public schools can’t be the best place to learn.” -Old Pithy

Posted by PITHOCRATES - August 10th, 2010

IT’S A PARADOX.  You can’t have both.  Great public schools.  And a Big Government nanny state.  The public schools can’t be the best place to learn if we graduate hopelessly incapable of taking care of ourselves.  You cannot reconcile the two.  It is impossible.  The need of Big Government is an indictment on public education.  It sucks.  It sucks so bad that our only hope to survive is by a dependence on government.

The Founding Fathers did NOT want a Big Government nanny state.  So they tried to limit its money and power.  The nation’s capital ended up in a swamp because Thomas Jefferson wanted to keep it out of the big cities (such as New York and Philadelphia).  History has shown that wealth (the big cities) and power (sovereign authority) combine to make the worst of governments. 

And they believed in the importance of education.  A real education.  History.  Math.  Science.  Architecture.  Engineering.  Economics.  For they believed an educated constituency was the greatest protection against Big Government.  They knew it.  Just as well as the proponents of Big Government knew it.  Know it.

So is it a coincidence?  That the rise of Big Government corresponded with a fall in the quality of public education?  If we need Big Government to be our nanny, we obviously are not well educated.  Otherwise, we could take care of ourselves.  Like we did for the first century or so of our existence.  So, did our poor public school system give life to Big Government?  Or is it the other way around?  Did a growing Big Government protect itself from the danger of a well educated constituency?

STUDENTS GRADUATE TODAY without being able to do the most simple of tasks.  To point to Australia on a map.  To identify the three branches of government.  To name a current member of the U.S. Supreme court.  The current Speaker of the House.  To identify the allies during World War II.  Or even tell us who’s buried in Grant’s tomb.

Few can define compound interest.  Or calculate it.  Few can make important investment decisions for their retirement.  But they can tell you how Christopher Columbus raped the indigenous people in the New World.  How America ruthlessly expanded westward, stealing land from the North American Indians.  How we cruelly enslaved a race to build a nation predicated on liberty.  You’ll find these in the curriculum.  And in the schools’ libraries.  But you won’t learn much about how Martin Van Buren created the Democrat Party to prosper on political spoils and patronage.  Or that the Democratic Party was the party of slavery.  The party of the KKK.  The party of Jim Crowe laws (the legal segregation of blacks after the Republicans ended slavery).  That it was the Democrats who enacted Prohibition because they knew what was best for us.

No, instead, students today learn about the importance of being sensitive to other people’s feelings.  That we should be our brother’s keepers.  That Big Government is good.  Important.  And necessary.  We teach them that FDR’s New Deal programs ended the Great Depression.  That massive government spending on make-work government jobs restored the economy.  It didn’t.  They learn that LBJ’s Great Society ended racial discrimination and poverty.  It didn’t.  These programs failed.  As many Big Government programs of compassion do.  But that’s not in the curriculum. 

Worst, most students haven’t a clue about economics.  What makes economic activity.  What hinders it.  The consequences of monetary and fiscal policy.  So they haven’t a clue about how all those compassionate programs of Big Government often lead to unemployment and recession.  So when they are old enough to vote, they are compassionate.  They approve of expanding the nanny state without any idea of the economic impact.

WE SPEND A fortune on public education.  Per student expenditures are among the highest in the world.   But the money we spend is never enough.  They always ask for more.  For the children.  So, to help the children, they raise taxes (property, sales, etc.).  For the children, they get the poor to gamble away what little they have (the lotto).  More money than ever before is collected.  For the children.  But it’s still not enough.  Which begs the question, where is all that money going?  Clearly, it isn’t to the children.

And because the children are so precious, they’re good leverage.  There’s nothing like a good strike at the beginning of the school year to get a better contract.  Why, they even have our precious children carry picket signs.  Because it’s all about the children.  Of course, unions protect dues-paying members.  And the last I heard, children don’t pay union dues.

But the teachers are underpaid and overworked, aren’t they?  If they are, they are the only union workers that are.  It’s why you join a union.  For leverage.  For negotiating power to get better salary and benefit packages.  And they do.  Your typical public school teacher does better than your typical salaried worker.  And they work less to get it.  Oh, they talk about ‘non-compensated’ hours worked after school.  That means approximately anything more than an 8-hour day.  The real world typically pays a salaried worker for only a 40 hour week when they often work 50 hours or more.  And they often don’t get the Friday after Thanksgiving off.  Or a Christmas break.  Or a winter break.  Or an Easter break.  Or the 3 months of summer off.   When you factor in the actual time worked and the benefits, they do very well.  Far better than private school teachers.  And private school students outperform public school students.  Hell, some of the most stalwart defenders of public education send their kids to private school.  Because they can.  The poor do, too.  When they can.  When they have access to school vouchers.  Everyone, when given the choice, chooses private school over public school.  If that ain’t an indictment on the public school system, I don’t know what is.

So where does all that money go?  To the teachers.  Their unions.  And the public school bureaucracy.

WE SPEND MORE money on public education.  But private school students do better than public school students.  And private school teachers make less than public school teachers.  So when we pay more we get less.  A more poorly educated student.  So what conclusion can we draw?  We are spending more money than we need to on public education.  And if we’re spending too much right now, spending more money sure isn’t going to make anything better for the children.  The teachers, perhaps.  But not the children.  Because the truth is this.  It’s not about the children.

The public schools are not educating.  They’re indoctrinating.  They’re producing good liberal democrats.  Because Big Government knows that an educated constituency is the greatest threat against their power.  So they control education.  They take care of the union teachers who, in turn, teach the students to love Big Government.  It’s rather Orwellian, really.  Elites taking care of elites.  At the expense of the children.  And our future.

Conspiracy?  If it wasn’t so much in the open, perhaps.  But the Democratic Party hasn’t changed much since the days of Martin Van Buren.  It’s about getting power.  And keeping power.  And you do that with patronage.  And dependency.  Big Government has given us Social Security, Medicare, Medicaid, unemployment benefits and numerous welfare programs.  And now the holy grail of them all.  National health care.  The larger these programs, the greater the dependence.  The larger the dependency, the greater number of loyal Democrat voters. 

SO IS THERE a paradox?  It depends on your point of view.  From outside of the public school system, yes.  If you think it’s about the children, yes.  But from inside the public school system or from inside of Big Government, no.  Because, there, it is not about the children.  It’s about well paid teachers.  And an uninformed electorate.  And the systems in place work very well in achieving these goals.

So, no, our public schools are not the best place for children to learn.  But it’s a pretty good place to indoctrinate them into loving Big Government.

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