Tax reduction or tax increase ? To all governments of this planet .

As long as the dynamics of an economy are balanced there is no need to change taxes .

The problem is that in a global «open» world market , the rupture of balance between offer and demand is almost a daily topic because of the different situation of each economy and whether we like it or not changes across the world are bound to affect every one .

Besides , facts are showing that governments everywhere are more and more politically minded and less prepared in economy ( Sounds like real good economists prefer to invest in themselves more than in the public function ) and that causes many governments to make electoral decisions very often contrary to what their economy really needs at a certain moment .

Rates and taxes more than anything else are the instruments that governments tend to use to manage economy in a presumably convenient direction .

The problem is that there is something which I define as «Critical point in the elasticity of an economy to tax moves » and that point determines whether reduction or increase of taxes will have a positive or negative impact on a certain economy at a certain moment and usually governments increase or reduce taxes without really knowing what will happen there after .

It all has to do with the level of balance between offer and demand which is the essential aspect of the economy .

To better undertand that balance or equilibrium , we should simplify it by recalling that citizens of a certain country or economic area , are at the same time instruments of production and consumers of the goods and services displayed by the offer ( the totality of production and service companies of the economy considered ) .

It then obviously follows that the costs of the offered products and services ( prices ) have to be in line with the purchase power of citizens in their consumer role . In other words the average salary has to be in line with prices to guarantee that production is absorbed by consumers in a perfect flowing continue that prevents inflation or excessive indebtment by consumers .

The global equilibrium between offer and demand is what governments are paid to watch for .

In a free economy the different companies that conform the offer are bound to fight for a convenient market quota and rentability and the instrument to achieve this is basically the type of investment that will result in a certain technological level and and/or the capacity to produce the biggest amount of units in the lower possible time with the lower possible » global cost » . The companies action along those lines will place their production at a certain level of competitiveness and specific demand .

Governments should be able to asses what is the situation as regards equilibrium between offer and demand ( prices and purchase power ) before deciding what to do with taxes and rates . The assessment should consider degree of inflation and consumer indebtment .

When the equilibrium between offer and demand has been disrupted most probably because taxes and rates plus excess of liquidity have favored speculation , we have what is known as a bubble .

Bubbles can only be confronted with deflation and austerity .

Austerity should be imposed in non producing areas and sectors causing the bubble and miracles on the recovery should not be expected .

Either deflation and cuts are promoted to provide a «V» shaped recovery or then you should be prepared for an «L» shaped recovery that should last well over the period that the bubble took to reach its peak .

The «V» recovery has undoubted advantages specially in the bigger economies , but the problem is that in national economies sensitive to world economy ( external commerce and investments ) unless a consensed action is taken , what a country decides by itself may not find the necessary positive global response and make that country suffer the accumulated effects of a «V» plus «L» recoveries .

In economies where offer bubbles occur with the consequent reduction of global tax revenues by governments , selective austerity and deflation should have priority to tax moves . And fiscal stimulus to investments in areas of strong added value ( technological and competitive ) should be prompted .

As a simple example it is obvious that a tax reduction in Germany is bound to promote activity further without impairing government tax revenue needs .

German economy today has a reasonable degree of flexibility response to tax reduction because domestic prices and purchase power are acceptably balanced and german products and services are competitive for the image they have for a healthy world demand .

In USA they may need to be reduced in some areas while increased in others . A selective managing of taxes is needed depending in the situation of each economy .

Permanent negligible rates are a mistake .The problem today is not so much the cost of money as the absence of investment motivations which favors money concentrating in speculation .

Today is ridiculous to think that Freedman or Keynes have the answer . Economy has become more complicate and subject to faster changes , so you may need to use some of the aspects of Freedman teachings today that will have to be replaced by some of Keynes recommendations in months or both theories might have to partially overlap at times under the conviction that what is good for today may not be good for tomorrow .


Published in: on agosto 25, 2012 at 11:12 am  Comments (55)