Absolute Income - the Government Side

Back in my community theater days, I had a discussion at the strike party with the boyfriend of one of the stage crew. We were discussing the utility of tax cuts, or the lack thereof. I told him that we could never do so with a GDP measure. GDP is based on productive activity in the real economy: government purchases, household consumption, net exports and investment in plant and equipment. He would need a different measure. We left it at that.

As an aside, government's impact comes in more than just buying stuff. It is a major contributor to household consumption through other and including the stuff it buys. It buys or creates natural resources (food, oil, land, and water), supplies, buildings, military assets, health care (military, civil service, old age, disabled, Indian, international, indigent), transportation infrastructure roads, airports, bridges, spaceports, and private capital used to make government purchases.

It also distributes current and future household income via employee salaries, military pay, government pensions, old age, survivors and disability income, interest on government trust funds, contractor pay and benefits, Temporary Assistance to needy Families, Food Stamps, supplemental security income, temporary disability income, refundable income and child credits, pays net interest to bond holders, and distribution of resource payments to tribal nations (land rentals and resource extraction). This amounts to more than half of household income resulting in consumption and savings.

Consumption from these income streams also creates private sector income, leading to consumption and savings (second and third order - which is private sector spending and savings resulting from private sector consumption). All of this leads to investment in land, plant and equipment for household consumption and exports.

Tax collections and double counting are the means by which all if this spending goes round and round. The double and triple counting is what is known as the multiplier effect.

There is one last chunk created through tax expenditures: preferred tax treatment of capital income and investment and cuts in expected salary taxes. This added liquidity is not small. It is what was being discussed at that cast party.

All that prefaces the answer to that question: what do tax cuts do for the economy? The question, which I think we also brought up at the party, is essentially the same: how do to measure the supply side? Let's talk, but you may not like the answer.

Absolute Income - Money and Class

This is part two in a discussion of the roll of tax cuts in the economy.

Conservative economists, the uninformed (that is most of) the popular media and a sad proportion of mainstream and even radical economists (even Marxists) put all investment in the same pot and count savings by the working, middle and upper class in the same pot as well. They also show concern for list economic activity due to tax increases. Economic cycles and crises are seen through the lens of consumption. Marx had no idea how wrong he was. Neither did Keynes. Hayek may have had hints, but if he did, he was not honest about them. This brings us to a small detour to monetary policy.

The Federal Reserve creates liquidity, aka money, based on government bond holdings in member banks and manipulating how much can be leveraged from those holdings. It also trades currency and buys junk bonds to stabilize liquidity. It does not, however, write down loan balances when it does so, which would cancel the money). Government borrowing (federal, state, educational and municipal) provides safe assets to backstop retirement accounts and mutual fund speculation.

All asset valuation is considered equally in official statistics and common usage. If Wall Street assets recover, depressed working class asset destruction goes uncounted, even though depressed prices (especially underwater loans) for such assets should be the operative definition of an economic depression. Hyperinflation is the opposite. It is when money is so devalued that you cannot afford bread, but could write a check for your mortgage. Sadly, most borrowers buy the bread first because they are hungry. Maybe preppers have the right idea. Holding gold, however, is not one of them.

You cannot eat gold. Eating through having gold only works if you are willing to trade it for something. In hyperinflation, where the supply of goods and services declines as the supply of money rises, gold buys less too. Goods and services, asset values and income dynamics must work in harmony.

Money is is not only a medium to exchange goods. It is also a decision tool to exchange power. Power is the ability to demand resources and labor. Capitalism seeks to consolidate this power into the hands of the owners of capital. Socialism seeks to distribute this power to society, using common action to do so. State capitalism and state socialism are the same thing, with modern mixed economiess consisting of private capitalism and social democracy. Cooperatives do combined action with neither governments or capitalists. Their exchanges are essentially labor based on a smaller scale.

The essential fact in any system that uses money is that money buys work from people. Since work is a function of time, as our lives, money essentially buys people.

Another way to look at money and savings  is through class analysis. Savings is the power to make others work without working yourself. When realized, savings purchase essentials and luxuries. Of course, even poor people deserve some level of luxury. In an unbalanced economy, the working class do not even receive the essentials.

Scarcity in essential goods is the incentive used to compel work. Inadequate income is used to compel work on a consistent basis. The argument against guaranteed income is that if work can be compelled, hyperinflation and shortages result. If toilet paper is unavailable, we are in a condition of scarcity. This is why I call SARS-2, the new official name of COVID-19, the Cornholio Virus.

Income tax data can help draw the lines between classes. Economic data show that purchasing power is in consistent decline for the bottom 90% of households. These include the poor who depend on transfers, the lucky poor who spend down assets as well and the working class. The middle class get more purchasing power from work each year and include the next nine percent. They are not wealthy because they must still work. They still experience scarcity and save for future income only. The top one percent do not work. They consider themselves the supply side.

Absolute Income - the Supply Side

This is part three in a discussion of the impact of tax cuts on the economy. It is based on a discussion at a cast party 25 years ago. The demand side is largely explained as a consequence of government action and the Main Street economy. This essay is about the other side.

Income is considered to be the return on assets, including sold labor. As we have seen previously, this includes the return on taxation of assets. The challenge for public policy is providing for adequate income and assets for all households so that no worker can be considered someone else's property. How badly we have failed at this is impossible to see until we look clearly at the elements of the "supply side."

Absolute Income is adjusted gross income plus unrealized income. Wealth taxes are an attempt to go after part two, in its stored form, on an annual basis. They will never pass because, if done correctly, the wealth will be destroyed. For some, that is likely the goal. If it is done ineffectively (by self reporting or creating loopholes) it legitimates assets which have no inherent value.

In the macro-economy, absolute income is gross national product plus stored future income plus speculative income. Current economic discourse and statistics do not, and likely cannot, capture the difference between the last two, although looking at income class helps.

This inability to separate future spending from speculation does not mean we cannot quantify unrealized income. Doing so shows why taxing wealth and unrealized income are close to impossible. Here is a hint: it does not really exist. Once that secret is out, capitalism' s days are numbered.

Unrealized income =
the net unrealized gain on traded equity and securitized assets held for less than a year
+ the unrealized net gain on assets held for more than a year
+ additions to retained earnings for the year that are attributable to shareholders or partners if it were to be distributed
 + increased value in a year of physical assets less their distribution expense.
All if the above include increased asset values and undistributed earnings for assets held offshore.

Asset prices and retained income and asset book values can be valued and are related but are not mutually exclusive. Asset prices may or may not reflect retained earnings and physical or market value of real assets and may, in fact, be junk assets based on fraud.

Bonds have the same features and are valuable based on currently expected future income - including whether tax income attributable from holding these bonds can ever be collected.

All value is market based. These values may or may not relate to the productive power of the underlying physical and human assets. Indeed, mass resignations and innovations may turn today's intellectual property into dust. This is why capitalism is a less than perfect driver of real innovation.

Income inequality and hierarchical control are designed to protect  against sudden devaluations in both private and state capitalism. Individual and cooperative socialist organizations (from communes to partnerships) always threaten intellectual property held by capitalists.

The value of the "supply side" is based on common perception, not in reality. Tax cuts and central bank liquidity are monopoly money until distributed into the real economy.

When such instruments are sold into retirement accounts, essentially turning stored labor of workers into monopoly money while the "supply side" trades it into new speculative instruments or the purchase of luxury goods, then the system collapses.

When mortgage debt is securitized and leveraged into monopoly money for speculation, the economy is heading for collapse. (It always seems to be housing debt).

When tax cuts become the initial capital for such speculation and to create "unrealized income," that is, mostly, then it is not good for society.  Trying to tax the unreal wealth in the speculation sector simply puts lipstick on a pig.

Taxing the return on all realized income at higher rates destroys the incentive and the ability to create the junk. Ironically, taxes based in realized value also make bonds based on such taxes more valuable. Taxing ephemeral wealth reduces the value of the same bonds. The best bond is a tax prepayment bond because everyone knows that in the end, it has no value.

Taxing Absolute Income or Wealth

This is part 4 of a three part trilogy on supply side economics. In part one, I explained all if the ways Government Spending becomes GDP.  In part two, I discussed the creation of money and it's functions in secondary markets and how this impacts the working class. In part three, I laid out a definition of absolute income in the macro-economy: GDP + unrealized income. I explained how the elements of the  latter, that it can be estimated and why it does not really exist.

Of course, anything that can be valued can be taxed. Indeed, it may even be easier to tax than capital gains, which largely rely in self reporting.

Either total wealth and growth in wealth can be taxed in the micro level.

As I wrote yesterday,

Unrealized income =
the net unrealized gain on traded equity and securitized assets held for less than a year
+ the unrealized net gain on assets held for more than a year
+ additions to retained earnings for the year that are attributable to shareholders or partners if it were to be distributed
 + increased value in a year of physical assets less their distribution expense.
All if the above include increased asset values and undistributed earnings for assets held offshore.

All if these amounts can be estimated by the entities owned as of December 31st of each year. Any overlap between stock price and retained earnings can be taken into account. Indeed, reporting this would be beneficial to investors. This is the easy part.

The hard part is generating the liquidity to pay the tax. Actually, this is not hard at all. It merely requires the entity owned to write a check. If course, you could not tax corporate income and the investor's share of it twice.

Likewise, if wealth were to be taxed, it is easier to tax the total value of the entity rather than taxing its owners. It is much less work.

Progressivity may or may not be a concern, largely because stock ownership is largely confined to the upper middle class (although they have the votes to block it) and the wealthy (who have the money to do so). Investor information would be given to the IRS so that firms may get a refund on taxes paid on behalf of the non-wealthy. The IRS must do the reconciliation to preserve investor privacy.

Who really shoulders the burden is a more serious concern. Because of the monopsonist nature of most employment and the monopolist nature of most goods, the wealthy will not pay it.

First, stock prices will go down to reduce burden.

Second, wages will go down.

Third, consumer prices will go up.

Firms have people who run the numbers and a duty to maximize shareholder value. Indeed, internal rents will increase because the labor to make such calculations will be taken from the labor surplus generated from extraction, production, distribution and enabling work.

As I have said before, the rich need to want to pay more so as to reduce the contingent income tax obligations on their children. The best tool to do so is to introduce a tax prepayment bond and an Asset VAT with incentives to sell to qualified ESOPs (including COOPs with one voting and multiple preferred shares, distributed on an equal dollar basis each financial period).

Global Corporate Tax Rates as Supply Side Economics

This is essentially a debate over supply side economics on a global scale. It assumes that the driver behind investment is available cash. This is complete and utter nonsense. If shareholders need to be paid dividends, multi-nationals may send money to do so.

The big shareholders and CEOs have plenty of money to maintain their domestic lifestyles. No one skimps on that additional mansion due to corporate tax rates. If I had a stash of money overseas, I would get it here, regardless of the cost, because I am not rich. Rich people have the luxury of not needing the money.

If companies need to start production in the American market, they may send money home - but sending money to the U.S. does not drive domestic investment. Domestic demand drives domestic investment. Tax policy (Value Added and Import) may have a small impact (but probably not). Any decision that close is not worth making.

Finally, the lower the tax rate, the less likely tax policy will matter. Like major donations, it is a non-issue. This debate is a symptom of how much the donor sector can influence government - not how government can influence society. Cue Captain Obvious.