Posted by: graemebird | June 30, 2009

Taxes On Capital Accumulation: MULTIPLICATIVE EFFECTS.

Brought to the front May 2010, to reflect the current debate on tax reform. Skip over the next section as its not topical. Start with “From Catallaxy.”
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Taxes On Capital Accumulation: MULTIPLICATIVE EFFECTS/The Mental Trap And Ethical Handicap Of “Revenue-Neutrality”./THE ULTIMATE HUMANITARIAN AND NATIONAL DISASTER OF THE CARBON TAX.

Yesterday I was talking to one of this countries most distinguished intellectuals. I suppose its true to say that I phoned him because I was in a frightful mood, and wanted to cheer myself up. Pretty selfish of me I guess. But I also wanted to congratulate him, on his calm and persistent fighting of the good fight. And this was a thing worth doing in its own right.

I brought up something that I wanted to express to him in order to emphasise just HOW BAD I reckon this carbon tax outrage will be. Even the rumour and shadow of the carbon tax is currently lnflicting upon us, largely unseen by most, untold destruction and hurt.

So I said, (not in any criticism of Gerry Jackson, who hates the carbon tax as much as I no doubt)………………………………………. But anyway I said that Gerry Jackson was understating his case. Well I wanted to talk about some other aspects of the problem. Other ways of picking up some notions of all the damage a carbon tax will cause….. and so I let go, as a supposed introduction, the idea that he understated his case because he was emphasising, for the most part, mostly-only Austrian capital theory, where in his usage “capital markets” referred to the structure of production. Not the markets for debt and equity but the networked production chain of the real economy.

Whereas I wanted to emphasise “capital markets” not just in terms of how the phrase is used to mean the structure of production in Austrian terms (Boehm-Bawerks pathbreaking insight into the “lengthening of the structure of production” and powerful Misean/Hayekian extrapolations on this insight) But you see the phrase can also be used for the other side of things. For the capital and equity funds markets, taken as a whole, and also encapsulating resource allocation decisions, within the individual firm, and also in the entirety of the economy.

I wasn’t implying that Gerry didn’t know all about this gear. He is Australias most knowledgeable economics commentator by a long shot. Good as the wonderful Frank Shostak is, and as magnificent as our unknown national treasure (bless her heart and rest in peace) Sudha Shenoy ( You were just up there in Newcastle and we barely knew you!!! The sadness. the sadness.) was….. still even with that tough competition Gerry is the best.

But anyway it was a lively discussion it was. My discussion with Prodos. And before I could rabbit on too much Prodos countered my suggestion that Gerry was understating the absolute disaster of the carbon tax. Prodos countered by explaining that economics is a science, Gerry in this regard is a serious scientist, and like any committed scientist he will exhibit often a tendency to understate matters. It was a very interesting angle. And of course I agree with all of what Prodos said.

You see if you read Gerry’s articles you will find that Gerry is very concerned and angry about the impending carbon tax, or cap and kill, and he is trying to explain just how bad it will be. But many will intuitively read the tone and the argument and imagine that the effect of the carbon tax might be a little less than Gerry’s tone would suggest. So you read the articles at Brookesnews, you absorb the tone and concern of Gerry, and maybe you have a sort of inner estimate about it. Maybe you intuit that Gerry knows his stuff. And he’s broadly right. But mayhaps you surmise that, after reading the argument, absorbing the tone, well you likely allow that Gerry is fundamentally right, that this will be a bad thing, this carbon tax, this cap and kill…….

But maybe your intuition tells you that Gerry is probably worrying a little bit TOO much. Maybe you think this nasty stupid leftist scheme will be bad, but not THAT bad. Maybe you will mentally post yourself between where Sinclair Davidson appears to be, in that you would see Sinclair as thinking it could be almost neutral so long as the carbon tax is “REVENUE-NEUTRAL” (The second stupidest phrase in the English language after “carbon sequestration”.)……

…. And after reading Gerry you place yourself between the perceived estimate of disaster that Sinclair appears to be intonating, and the perceived estimate of disaster that Gerry appears to be impressing upon you. Perhaps you wind up with a sort of WEIGHTED COMPROMISE BASED ON TONE. A position that lies roughly between the perceived position of Gerry and the neoclassical tribe.

I tell you straight. Prodos has it right. Gerry is holding back. This carbon tax ought to smell like carrion to you. This cap-and-kill or carbon tax (it does not matter which) is going to be a peacetime economic disaster totally unparalled in the history of the English-Speaking world. Until the day we get rid of it and a long time after that, and depending its duration, it will be far worse of a disaster then the Great Depression. At least if we cannot reverse these measures in time. The shadow of the carbon tax is doing immense damage even now. Its stopping our stock of coal-electricity generation plants from being renewed and enhanced JUST FOR ONE EXAMPLE. And its causing a string of other problems, some of which I’ve talked about elsewhere. I have to be brief on some matters since this post must be somewhat self-contained, and not spill out into a treatise on economic science more generally.

Gerry is holding back. If he isn’t holding back then we’d have to face the implausible idea that our best and most knowledegable economist is not taking a wide enough view of this subject. But Prodos has it right on this score. The reality will be much worse then the impression the economic scientist Gerry is giving. Much much worse.

Below I talk about how two taxes on capital update and accumulation, may interact with each-other, so the net effect is not just additive. Not merely loading one depredation upon the other. Not merely piling straw on the camels back. But in the case outlined below, (inspired by Reisman), I have discussed how these two particular taxes on capital are MULTIPLICATIVE in the hurt that they do us.

It could be postulated, that in the year 2100, under a lot of strange assumptions, that the carbon tax, added to these depredations, with other taxes cut, that this scenario might be an additive affair. An affair that might be compensated for by tax cuts in other areas. In an hypothetical Australia, awash and glutted in nuclear power generation, with an whole set of other hypothetical factors on the fly……….. This could (just) be postulated.

But this is not the case in the real world. The damage that the introduction of the carbon tax will have, to our capital accumulation and update, will DEFINITELY HAVE A POWERFUL MULTIPLICATIVE COMPONENT.

THERE IS NO REVENUE-NEUTRALITY COMPENSATORY MEASURES THAT CAN DO THE JOB.

Talk-thee-not of ‘revenue-neutrality’. Thats all crap, shysterism and kindy-economics. The carbon tax in no way can be compensated for. This tax cannot be compensated for and the introduction of the carbon tax will be revenue-negative as it destroys government takings from virtually all other sources. Each month the carbon tax will do damage that will continue to reduce government revenues from all other sources AND EVENTUALLY FROM ITSELF. Such will be the ongoing damage.

There is simply no way to compensate for this poxy, hateful, malicious, outrageous carbon tax (or cap and kill) that is being proposed. I don’t get into the reasons for that below, in an entry originally posted at Catallaxy. I don’t prove my case to the nth degree. The post was already getting overly long. And all the contributing reasons I have that would prove this case have been offered in dribs and drabs many times over elsewhere.

But what I do below is show you THE PRINCIPLE, of how devastating one depredation on capital accumulation can be …………. WHEN IT DOVETAILS WITH A SECOND DEPREDATION.

And I assure you that the carbon tax will be A THIRD MULTIPLICATIVE DEPREDATION though I do not prove this outright on this thread.

Mark my words. MARK MY WORDS. This carbon tax will be a disaster, mark my words, it will be a slow-motion catastrophe. Like having to watch the movie the titanic three times each day and then dreaming it in your sleep.

An absolute disaster.

A disaster of huge proportions both from an economic and from an humanitarian point of view.

Try and absorb just how it is that two separate depredations can have a far greater effect than the sum of their parts.

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FROM CATALLAXY:

At the moment we have two fatal taxes that fall most heavily on capital accumulation. The two taxes are the company tax on retained earnings, always unacceptable. Never OK. Not only thieving but stupid thieving.

The second is the inflation tax. Both the high rate of growth in money and its instability. Instability of monetary growth causes FURTHER INSTABILITY in spending due to the fact that this high and unstable monetary growth ALSO leads to wide swings in the demand for money for holding (and therefore the so-called “velocity of circulation”)

Our capital accumulation will always be tepid, no matter how much debt or foreign investment we attract or indulge in, so long as we have both these taxes together. They are not merely additive in the destruction they cause. They are multiplicative.

Now supposing we cut spending to allow ourselves to have either one or the other but not both. Here I am trying to demonstrate this multiplicative aspect of these two outrages.

Suppose we sacked enough taxeaters and closed down enough government departments to get rid of the company tax on retained earnings. But we are assuming that we still had left our errant money growth, and monetary policy?

Well capital accumulation could still go ahead powerfully strong. It would be in fits and starts. Doing business would be like now; never knowing whether the sudden down-turn or upswing in ones own business was any sort of reliable barometer. Costs would be imposed in terms of higher inventory levels then we had to have. Too much emphasis would be placed on asset appreciation and this would make a lot of investments less effectual. But there is no doubt that we could power ahead. Just getting rid of one of these two depredations.

Our trade balance would massively improve. Since having no company tax, we would no longer have any taxable income upon which we were able to deduct interest against. Supposing if our trade balance didn’t improve? What would this mean? It would probably be a sign of the force multiplier of foreign investment. Unlike in the current scenario this ought not be looked askance at (ie the continuing hypothetical trade deficits) since they would imply an investment boom, with real resources pushing up productivity very quickly. Although care would need to be exercised that the foreign money wasn’t merely blowing out land prices. We would have to be more vigilante about bubbles. Simply because we would be so much more dynamic.

How about the other combination? Keep the company tax but deep six the monetary inflation?????

Well there would be massive transition problems with this. We have to simply put these transition problems and assume that for a very long time we have been in a situation where we still have the current company tax arrangements, but that for a long time we have been used to a scenario of growth-deflation 100% backing.

Thats the scenario. Once all transition issues were in the past could we THEN powerfully accumulate capital goods? Even with the current company tax still in place?

Yes we could do very well. We can have very good capital accumulation with one or other of these depredations in place but of course we must get rid of both of them with extreme prejudice. Nonetheless it is manifest that with one or the other but not with both we can get up a head of steam of very rapid capital accumulation.

Now we’ve seen why this is possible in the first case. But how can it be possible in the latter case? When we STILL have this company tax?

The answer is that the combination of falling prices and depreciation schedules SANITIZES a good deal of the retained earnings to allow for continual improvement of ones capital stock. There is another indirect effect also. Growth deflation will understate nominal profits so reduce the size of government. Growth deflation will lead to more vountary retention of funds within the business for the purpose of spending now to reduce recurring costs. It will lead households to really try a lot harder to save money. All this would aid capital accumulation.

But the depreciation sanitation is the main deal here. You see suppose you have your major heavy metal equipment and you are depreciating it over ten years if thats in accordance with current schedules. That allows to keep retained earnings in the business and build up a fund to replace the equipment in ten years time. Hence supposing if the equipment cost you one million. That sanitizes 100,000 away from the taxman, and you can build it up and you may well be lending it to other businesses, but one way or another you can have this building fund and not be taxed on it. Not be taxed on it even if the retained earnings wind up being spent, rather then as an actual fund, to improve productivity in other ways and reduce recurring costs.

Now you get to the end of the 10 years. And one way or another in real terms you have this million of untaxed resources that you’ve built up from the depreciation. Well since prices were falling all that time then your capital expenditure budget has massively increased. Not only can you replace the equipment. But in my example you can replace the worn equipment with BETTER equipment, for only two-thirds the cost. Or you can massively increase your cap-ex budget and increase your productivity with more and not just better machinery and begin depreciating it year one.

Now consider the reverse situation where inflation leads to overstatement of profits, and inadequate funding for new cap-ex spending? This is a key reason why the depredation of taxes on retained earnings and the depredation of the inflation tax has a multiplicative effect.

Well the main point I haven’t hinted at here is that the carbon tax will also have a multiplicative effect toward the direction of capital destruction, when combined with the other two.

So you have a company tax under growth deflation. Its stupid. Its unacceptable. It not just thieving but idiotic thieving. Yet society can still progress. And peoples capital update budgets can keep getting better if they are one of the companies that does survive.

Now we could have the inflation tax and no company tax. It will lead to an unfair society. It favours the already rich. Investment funds will be less effectually spent. There will be booms and busts. But in a stop-start and erratic fashion, you could still get massively powerful capital update under this situation. You would have to watch out for bubbles a lot more carefully then today. A recent modern example thinking only a decade or two back was the Republic of Ireland. Irish Catholics, not heretofore known for dynamic business wealth creation taught us all that our bigotries were entirely unfair and unfounded. Because immediately after they dropped the company tax rate…. was it to 10%? Or did they entirely eliminate it? Well the place just exploded and with economic performance comparable to South East Asian tigers of the time. This is the secret you see. Capital accumulation. The focus on retained earnings.

But what else did we see? A classic Georgist situation right up front. Half of the higher living standards frittered away to higher rents and housing prices. Inequality promoted since the new wealth spilt over into land appreciation. This ought to have been anticipated in advance. And met with determined efforts to make sure vertical development was in permanent glut. Georgism makes many sound observations and no matter how much you hate the land value tax you must give the man his due.
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NOW WE GET TO THE REAL POINT OF THE STORY.

What is all this in aid of? We found out that we could have powerful capital accumulation with one or the other but not with both depredations on capital development. We ought and must have neither but we can still progress as a society with one or the other.

The current situation is one where we have tepid capital update and accumulation but with relentless trade deficits and growing debt. Remember above. If you had trade deficits, and no serious bubbles, and no company tax this would actually be a sign of powerful capital accumulation. But our current situation, thanks to the multiplicative affect of the dual depredations on capital accumulation, is that we have relentless trade deficits, growing calls for protectionism, and only tepid capital accumulation to help deal with our spiralling debts.

WHAT IS THE POINT OF ALL THIS:

Wait for it………………….

THE CARBON TAX OR THE CAP AND KILL WILL BE THE GREATEST PEACE-TIME SELF-INFLICTED ECONOMIC DISASTER DUMPED ON THE ENGLISH-SPEAKING WORLD DURING ITS ENTIRE EXISTENCE. IT WILL BE A THIRD DEPRADATION PUSHING US TOWARDS CAPITAL DESTRUCTION. IT WILL NOT HAVE AN ADDITIVE EFFECT. THE EFFECT WILL HAVE A MULTIPLICATIVE COMPONENT. THIS WILL BE A DISASTER BEYOND ANYTHING AUSTRALIAN-BORN PEOPLE HAVE EXPERIENCED SINCE WORLD WAR II.

There really is not doubt about this.

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Responses

  1. Attempting to respond to the astonishingly gutless traitor Terje:

    “Okay. Thanks for setting me straight on where you stand.”

    It doesn’t matter to you does it Terje? None of the reality matters to you does it? It doesn’t does it? No constituent part of the scientific or economic context relating to this question matters to you right?

    “Okay. Thanks for setting me straight on where you stand.”

    What is YOUR view on the matter? And on what basis do you hold it?

    No amount of ignorance on your part can shield the rest of us from the consequences of the policies you have been tirelessly championing year in year out. Its not a situation like those cartoon characters who run off a cliff but the laws of gravity only act on them when they look down.

    You ought to make an accounting of yourself. What crazy beliefs are you holding that you are not telling us about?

  2. Shucks. Here I am alerting the public to the absolute catastrophe coming our way and almost no response. If there is 20% unemployment then its your job security that is on the line here.

  3. Can you translate that into english, darling?

  4. Its better if you just ask a bunch of specific questions to try and get your head around it Humphreys. Sooner or later you are going to have to learn economics.

  5. “a carbon price of $A225 would correspond to a cost per working person of more than $A12,000 per year,”

    One tonne of coal can be converted to about 2 barrels of oil. If one tonne of coal winds up costing 60% of $225, then this adds 67.5 dollars for every barrel of synthetic diesel.

    This is unacceptable. Any compromise with this idiocy cannot be tolerated.

  6. who is this humphreys?

    I’m just a simple sassy gal into rotound right wing intellectuals 🙂

  7. Well you are only human. This sort of thing always happens. You might call it a curse. But that would be going a bit far. More of a burden to bear.

    Anyway pull yourself together. Try and act “professional” as it were. And in order to get your head around this economics, then you ought to ask specific questions so that I can clarify. You got to keep a stiff upper lip sister. Australia was built by tough sheilas who didn’t go to water just having an email conversation. So put away that mirror and make-up, because just for one thing I cannot see what you look like anyhow. Focus on the task at hand and stop fussing with your hair just this once. And try and learn what you have to learn to help save this nation. Because I assure you our opponents are determined, they are ruthless, and they will at least ACT like they want to destroy this country.

  8. I’m sorry. I cannot have these flashing displays of feminine irrelevancies when we are dealing with such an important subject. There are temporary cures for female hysteria and they involve batteries and things and so get back to me after you’ve been through a bit of self-medication. But I cannot let the above two posts stay. Too flippant. When our country is sustaining such determined attacks on its viability.


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