Friday, August 31, 2012
Does taxation stifle creativity?
The notion that high taxes on people with more income than they can possibly spend discourages them from any activity that might further increase their incomes is a popular one with many people. A Texas Senator used to say that he didn't know any poor man who might give him a job. The implication was that this Senator had a job working for a rich man. Well, perhaps he did. It's not unheard of for elected officials to work for wealthy benefactors. Mr. X, a very wealthy man, might approach the Senator and offer him a generous campaign contribution in exchange for a special deduction that he could use in preparing his tax return. In that sense, the rich man had "hired" the Senator.
However, the belief that high taxes stifle innovation can not be verified by experience. Innovators are usually young people, men or women, who are filled with energy and ideas but haven't yet made their fortunes. We like to think of such persons as Bill Gates and Steve Jobs as important innovators. They were, of course, and made a lot of money from their innovations. But they had not yet acquired fortunes when they were innovating. The taxes on their incomes didn't stifle them.
Gates' great innovation was the recognition that if nearly everyone were to possess and use a computer they would need a program that would translate the keyboard instructions they could remember and understand into the tedious machine language needed to operate the computer. Such a program is called an Operating System. An engineer whose name I do not know had created an operating system that didn't take up much memory and was well suited to the rather simple computers available at the time. The engineer called the system "QDOS," which stands for Quick and Dirty Operating System. Gates bought it from him and changed the name to "DOS" or Disc Operating System. He peddled a version of it to IBM for use on the early IBM personal computers. The rest is history.
This belief that high taxes stifle innovation is used to thwart attempts to make the super-rich pay a larger share than they do in the cost of governing. In the case of our own federal government, the result is that the super-rich do in fact contribute a large share of the income, but not in taxes. Their contribution is to purchase government bonds. The result is almost the same as taxing them, except that the bonds eventually have to be repaid with interest. The government is thus forced into a kind of shell game or Ponzi Scheme simply to acquire the income needed to provide all the services that we citizens receive.
Another part of the myth is that our government spends too much money anyway. It should do less and spend less. It acts as a drag on the economy because it sucks so much money into itself. This part of the belief also fails the test of experience. There's a simple question: what does the government do with the money? It hires people to perform various functions and services. The money goes right back into the economy. A question for study is, is it better for the economy for the government to spend a certain amount of money, or is it better for private individuals and firms to spend it? It depends on the specific project on which the money is spent. A number of super-rich men are taxed, say a billion dollars, to pay for building a bridge across a river. The bridge enables goods to be transported across the river cheaply and the resulting economic activity adds, say, a hundred million dollars to the economy. The government has invested the money in a facility that provides a rate of return of ten percent. If the super-rich men had been allowed to keep the money, would they have invested it in something equally worth while? Maybe, maybe not. Of course, not all decisions by government officials and employees are as valuable as the decision to build the bridge. Government has been known to build bridges to nowhere just to please the constituents of an important Senator.
I welcome any comments, discussion, criticism, even castigation of my opinions. You can post them here if you have a Google account. In any event, you can send them to me by e-mail.
However, the belief that high taxes stifle innovation can not be verified by experience. Innovators are usually young people, men or women, who are filled with energy and ideas but haven't yet made their fortunes. We like to think of such persons as Bill Gates and Steve Jobs as important innovators. They were, of course, and made a lot of money from their innovations. But they had not yet acquired fortunes when they were innovating. The taxes on their incomes didn't stifle them.
Gates' great innovation was the recognition that if nearly everyone were to possess and use a computer they would need a program that would translate the keyboard instructions they could remember and understand into the tedious machine language needed to operate the computer. Such a program is called an Operating System. An engineer whose name I do not know had created an operating system that didn't take up much memory and was well suited to the rather simple computers available at the time. The engineer called the system "QDOS," which stands for Quick and Dirty Operating System. Gates bought it from him and changed the name to "DOS" or Disc Operating System. He peddled a version of it to IBM for use on the early IBM personal computers. The rest is history.
This belief that high taxes stifle innovation is used to thwart attempts to make the super-rich pay a larger share than they do in the cost of governing. In the case of our own federal government, the result is that the super-rich do in fact contribute a large share of the income, but not in taxes. Their contribution is to purchase government bonds. The result is almost the same as taxing them, except that the bonds eventually have to be repaid with interest. The government is thus forced into a kind of shell game or Ponzi Scheme simply to acquire the income needed to provide all the services that we citizens receive.
Another part of the myth is that our government spends too much money anyway. It should do less and spend less. It acts as a drag on the economy because it sucks so much money into itself. This part of the belief also fails the test of experience. There's a simple question: what does the government do with the money? It hires people to perform various functions and services. The money goes right back into the economy. A question for study is, is it better for the economy for the government to spend a certain amount of money, or is it better for private individuals and firms to spend it? It depends on the specific project on which the money is spent. A number of super-rich men are taxed, say a billion dollars, to pay for building a bridge across a river. The bridge enables goods to be transported across the river cheaply and the resulting economic activity adds, say, a hundred million dollars to the economy. The government has invested the money in a facility that provides a rate of return of ten percent. If the super-rich men had been allowed to keep the money, would they have invested it in something equally worth while? Maybe, maybe not. Of course, not all decisions by government officials and employees are as valuable as the decision to build the bridge. Government has been known to build bridges to nowhere just to please the constituents of an important Senator.
I welcome any comments, discussion, criticism, even castigation of my opinions. You can post them here if you have a Google account. In any event, you can send them to me by e-mail.
Labels: Bill Gates, do taxes stifle innovation, DOS, Republican superstitious, Steve Jobs, taxing the rich
Sunday, November 16, 2008
Troubles for Republicans
Following the election of November 4, Republicans have been thinking out loud - well, at least in print - about the future of the Republican Party. Some of the Party theorists, like Richard Viguerie, argue that the Republicans lost the recent election because they didn't live up to their beliefs while in office. These beliefs include small government and low taxes, fiscal discipline, and respect for and encouragement of individual initiative and responsibility. They argue that while George Bush gave lip service to these ideals he contrarily increased the size of government and embraced perpetual borrowing to pay for the bloated government.
Other thinkers, including several Republican governors, realize that the national Republican Party's problem is at least partly due to the incompetence of the Bush administration. Katrina comes to mind. The Party will have to rebuild its reputation as a competent governing group if it is to regain the trust of enough American voters to regain some of the power it had just a few years ago.
My diagnosis, that of a life-long Democrat, is that the basic message of the Republican Party is out of date. I remember hearing a local Republican business man in my home town tell me about 75 years ago that "government should leave business alone." Other Republicans have said quite often that "government spends too much money." That was one of President Gerald Ford's favorite sayings.
One serious problem for the Republicans is that many middle-class professional and retired persons, like myself, who used to be loyal members of the Party have left it. Many well-to-do persons see the Republican policy of reducing taxes on the rich as simply a hypocritical gimmick to reward some of their election campaign funders. Almost nobody takes seriously the argument that rich folk must be allowed to keep a lot of their money so that they will have money to invest in new enterprises to provide employment, etc., etc., etc., and that taxing them will discourage them from such investment.
As a counter example, consider Microsoft. This was a firm started with a very small investment. All Bill Gates needed was a personal computer with enough capacity to write and store code. His most important investment was to buy an operating system from another engineer who had named it "Quick and Dirty Operating System" or QDOS. Gates changed the name to "Disk Operating System" or DOS. He then had a product that manufacturers of personal computers needed to help sell their machines to a public that knew nothing about machine language programming.
A better counter example is the state of the economy during the Clinton administration. Clinton increased taxes to put the federal government on a pay as you go basis. These "high" tax rates certainly did not stifle the growth in business during the Clinton years. The "low" tax rates of the Bush years don't seem to have had the effect of stimulating the economy. Recent experience does not provide an proof of the Republican theory that letting the Rich keep more of their money will stimulate the economy. The short word is "trickle-down economics." The Republicans promoted it when I was a child and they still promote it today. It's an idea that they should discard.
A huge problem for the Republican Party is that it has allowed a rather small but very dedicated group of Conservative Fundamentalist Christians to dictate many of the policies of the Party and of any Republican administration. Party leaders, such as Nixon and Reagan, cultivated this particular bloc and made them the core constituency of the Party. The class of professional people has tended to leave the Party as a result. The Party is coming apart. What it needs is a new leader who can put together another coalition that will hold together.
Other thinkers, including several Republican governors, realize that the national Republican Party's problem is at least partly due to the incompetence of the Bush administration. Katrina comes to mind. The Party will have to rebuild its reputation as a competent governing group if it is to regain the trust of enough American voters to regain some of the power it had just a few years ago.
My diagnosis, that of a life-long Democrat, is that the basic message of the Republican Party is out of date. I remember hearing a local Republican business man in my home town tell me about 75 years ago that "government should leave business alone." Other Republicans have said quite often that "government spends too much money." That was one of President Gerald Ford's favorite sayings.
One serious problem for the Republicans is that many middle-class professional and retired persons, like myself, who used to be loyal members of the Party have left it. Many well-to-do persons see the Republican policy of reducing taxes on the rich as simply a hypocritical gimmick to reward some of their election campaign funders. Almost nobody takes seriously the argument that rich folk must be allowed to keep a lot of their money so that they will have money to invest in new enterprises to provide employment, etc., etc., etc., and that taxing them will discourage them from such investment.
As a counter example, consider Microsoft. This was a firm started with a very small investment. All Bill Gates needed was a personal computer with enough capacity to write and store code. His most important investment was to buy an operating system from another engineer who had named it "Quick and Dirty Operating System" or QDOS. Gates changed the name to "Disk Operating System" or DOS. He then had a product that manufacturers of personal computers needed to help sell their machines to a public that knew nothing about machine language programming.
A better counter example is the state of the economy during the Clinton administration. Clinton increased taxes to put the federal government on a pay as you go basis. These "high" tax rates certainly did not stifle the growth in business during the Clinton years. The "low" tax rates of the Bush years don't seem to have had the effect of stimulating the economy. Recent experience does not provide an proof of the Republican theory that letting the Rich keep more of their money will stimulate the economy. The short word is "trickle-down economics." The Republicans promoted it when I was a child and they still promote it today. It's an idea that they should discard.
A huge problem for the Republican Party is that it has allowed a rather small but very dedicated group of Conservative Fundamentalist Christians to dictate many of the policies of the Party and of any Republican administration. Party leaders, such as Nixon and Reagan, cultivated this particular bloc and made them the core constituency of the Party. The class of professional people has tended to leave the Party as a result. The Party is coming apart. What it needs is a new leader who can put together another coalition that will hold together.
Labels: Bill Gates, low taxes, Microsoft, QDOS, Richard Nixon, Richard Viguerie, Ronald Reagan, small government, Trickle-down economics
