Managing River Levels with Tax Policy

It is hard to dispute the observation that the exponential growth of productivity is vastly outpacing the (at best) linear rates of increased consumption. The systemic risk to the consumption engine is a slow walk but we seem to have been going at it since the 90s as evidenced by the flat rate of job growth since then. Your book provides a thought provoking metaphor to model what is going on here- The purchasing power river has companies along its bank that are withdrawing substantially more purchasing power than are returning in the form of lower cost products and employee wages.

What if purchasing power as a public resource was managed with a market mechanism that provided disincentives for net withdrawals of purchasing power? For example, assume the yearly consumption of the average middle class family was calculated and the company does not have enough employees with the wages to balance that inflow of capital. When the imbalance becomes egregious, there is a monetary penalty- for the sake of simplicity, let’s say the penalty is a progressively higher corporate tax rate, so that at some point the business either figures out jobs for enough workers or gives up any further automation. What this does is make explicit the rule that Henry Ford intuitively grasped. The implementation is an orthogonal subject but I would think it would rely on an arms length mechanism like taxation rather than micromanaging regulation mechanisms.

I have been throwing rocks at this particular approach to see if it will collapse and I wonder if you would care to join in. Here are the objections I have posed and the responses I have to them.

Objection1: Growth relies on venture capitalists taking risks on new ideas. They won’t be as willing to take those risks if the returns are capped as this scheme proposes to do. Answer: The cap is only on the domestic river. That is we are only concerned in regulating the balance between revenues from domestic consumption versus the returned purchasing power expressed as domestic price reduction and employment of US workers. This also has the benefit of provoking the corporation to have strong plans for competing in foreign markets. Global revenues often dwarf domestic revenues, so this will provide the substantial returns for venture capitalists that is vital for a vigorous entrepreneurial environment.

Objection2: Depending on the business, the revenues could be huge, but there are substantial other costs such as research on future products 90% of which are not productized. These added costs are generally correlated with vigorous growth companies. The proposal only measures incoming purchasing power versus returned purchasing power, so keeping them in strict balance prevents revenue from getting directed towards expansion and further research, thereby retarding growth. Answer- the proposal could allow for set asides for research and expansion. These set asides would be substantial for startups. After say 5 years, the set asides are reduced to fixed amounts which may be adjusted by appeal to regulators. There is a disincentive to game the set asides (labeling other budget items as “research” or “expansion” to pump up the numbers) because to qualify for the reductions, the books on research and expansion budgets must be open to spot checks by regulators.

Objection3: If this proposal were in place since the 20s, the percent of population involved in farming would not be 2%, but closer to the 25% it was in the 30s. How do we allow for progress in the kinds of jobs we do. The proposal does not allow for justifiable job destruction. Or do we think farming really ought to be done with hoes and rakes? Answer: For farming in particular the same answer as for Objection 1. Due to substantial international sales of American farm products, This may not be a satisfactory response for other industries, and if there are no other market based responses, it might be necessary to resort to more intrusive regulatory rulemaking for specific industries.


About John JMesserly

Mostly harmless

Posted on 2011-10-25, in economics, purchasing power, regulation, taxation. Bookmark the permalink. Leave a comment.

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