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Tuesday, 30 April 2013

Western Socialist Governments Destroy Economy with Taxes and Inflation

Slow economy ahead

Both inflation and taxes are the worst enemies of productive work and earning.

Taxes, especially high ones, act as a discouragement, if not a deterrent, from working hard to acquire money that you will see taken away in front of your very own eyes.

Inflation will see to it that what you are allowed to keep will be in reality much less than what appears to be.

In my personal experience I have to say that, when I was earning reasonable money from my internet commercial activity, realizing that a big chunk of it was not mine at all thanks to the Inland Revenue did cool my passion and dampen my enthusiasm a bit, not much but a little. So, when I became more involved in political writing - nothing to do with taxes but for entirely different motivations -, I was not so keen to devote more time to my commercial websites as I might have been without the lurking presence of high taxation and high inflation.

I am interested in economics, and I was very pleased to find in what I consider one of the best blogs around, that of Alexander Boot, such clear, simple and, more importantly, well-founded explanations of how Western current financial woes originate in the political sphere.

Inflation may have economical causes too, but what we have now is astronomical:
Behold: £100 pounds in 1850 became £110 pounds in 1900 -- a negligible inflation of 10% over 50 years. That meant that a baby born at the time with a silver spoon in his mouth, which utensil equalled, say, a solid middle-class income of £500 a year, could live his whole life in reasonable comfort even if he never made a penny of his own. Conversely, £100 in 1950 became £2000 in 2000 -- a wealth-busting, soul-destroying inflation of 2,000%.
Today's skyrocketing inflation derives from heavily indebted governments' habit of printing too much money to repay their debt with it.

Economic value, despite the appearances, is not in the money, it is in the goods - products and services - that people need and are willing to pay for. So, if inflation depends on the proportion between the goods produced and the currency in circulation or, as Milton Friedman put it, is "too many dollars chasing after too few goods", it is evident that, coeteris paribus,  the more money is printed the higher the rate of inflation.

The government is responsible in two ways: first by overspending and getting into debt ("Excess government spending causes inflation", wrote American economist Alan Greenspan, who served as Chairman of the U.S. Federal Reserve from 1987 to 2006, in his book The Time of Turbulence (Amazon USA), (Amazon UK)), and then by trying to get out of it by "quantitative easing", i.e. printing money.

High inflation does all the wrong things for the economy: not only, along with high taxes, deters people from working hard, but also it deters them from saving and encourages them to spend and even take debts. After all, the money you borrow now has more value than when you have to repay it in the future.

If there are not enough savers, there will not be sufficient funds for businesses to borrow, which will slow down enterprise and productivity and therefore reduce employment. It is a domino effect, or rather a geometric progression, multiplying instead of summing the terms. A wrong choice, a bad move causes a concatenation of cascading calamities.

This is what socialism invariably and solely does: destroy. It destroys many other things, but here we are talking economics so we concentrate on the fact that it destroys wealth and the ability to produce it.

And Western governments become bigger and bigger and spend as if there is no tomorrow (literally as well as metaphorically) because they run on socialist principles like redistribution of wealth and, as Marx described the second element of communism, they give "to each according to his needs", a perfect definition of the welfare state (the first element of communism is "From each according to his abilities").

As for high taxation:
The highest rate of income tax peaked in the Second World War at 99.25%.It was slightly reduced after the war and was around 90% through the 1950s and 60s.

Tax revenues as a percentage of GDP for the UK in comparison to the OECD and the EU 15. In 1971 the top-rate of income tax on earned income was cut to 75%. A surcharge of 15% on investment income kept the top rate on that income at 90%. In 1974 this cut was partly reversed, and the top rate on earned income raised to 83%. With the investment income surcharge this raised the top rate on investment income to 98%, the highest permanent rate since the war.
That was true madness, before Thatcher restored sanity and reduced the tax burden.

The reason why the 50% tax top rate on incomes higher than £150,000 introduced in 2010 by Labour was lowered to 45% in the 2012 budget is because it was costing the Exchequer an estimated over £1 billion a year in loss of tax revenue.

The Centre for Economics and Business Research correctly predicted:
There is good evidence that an increase in high-rate Income Taxes beyond 40% will lead to a loss of revenue to the Exchequer over the coming years.
Calculating the taxable income elasticity
Higher rates of Value Added Tax and National Insurance Contributions mean that the revenue maximising rate of Income Tax for the very rich has fallen over the past year. Combined with increased labour and capital mobility, this means the revenue maximising top rate of Income Tax is likely to be less than 40%.

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