Today, I am going to continue my discussion on economics and bring in the effects of government involvement. First I would like to state my personal definition of economics. Economics is the study of the distribution of scarce resources to benefit mankind. I prefer my definition for several reasons and many economists might disagree with my brevity, but I like it for that very reason. Yin and yang, truth or consequences, hot or cold, free or costly, synonym and antonym or any other pair of opposites explains how you need to think about economics. What’s good for the goose is good for the gander is a different story and I will not discuss geese in this treatise.
I think the word scarce is important in my definition. If we were not talking about scarce resources, we would not need economics. Everyone would live a life of luxury with an abundance of everything. Of course, we would all become depraved and covetous because someone had bigger hands, bigger arms, bigger storage bins or bigger dreams. Let us stay in the real world and avoid the depravity caused by abundance.
For the discussion about government involvement in economics, it is best to remember the two premises. If you want less of something you tax it. If you want more of something, you subsidize it. Yin and yang. My discussion works for all government structures, but I am going to limit my discussion to the U. S. federal government. For instance, if the government wants more people to own their own home, they allow you to deduct the cost of your mortgage on your federal income tax. That is a subsidy. Think about that. They give you a tax break on your home, giving them less tax income which means raising taxes on someone to make up for the loss of revenue. Sooner or later that person with their taxes raised is you. To us it is a tax – money out of our pocket. To the government it is income.
For a mini-case study, consider the war on poverty. The government expresses a will to pay our tax money to help poor people. The more government money that is involved increases the incentive for more people to get into the poverty removal business. Next thing you know the group of poverty suppressors realizes that if they actually got rid of poverty, their government paycheck would go away. So, the poverty suppressors job has changed from getting people out of poverty to assuring more people live in poverty to increase your check from the government. Now we have our government subsidizing poverty. Get the idea?
The government needs more tax money to keep the subsidies going, so the increase taxes on corporations to pay for their social program. What happens next should surprise no one. Raising corporate taxes means the companies have less income, so they either raise prices or cut back on hiring new people. At some tax level the corporations will realize it would be more profitable to live in an environment that was more corporate friendly, i.e. lower taxation countries. Corporations reduce jobs and leave the country which means more people out of work and more poverty.
Our government has subsidized poverty reduction groups and paid for it by driving away the tax base that could have solved the problem.