Tuesday, January 11, 2005

Redistribution will cause more Inflation

If the ASG wants to combat inflation using the FY04 4 million-dollar surplus, the most logical way to do it is to give the surplus back to the people through tax refunds. Of course, the Treasury should calculate refunds in the same manner it took the money in taxes: through percentages. The percentage a person or business paid of the sum of taxes collected in revenue this past year is the percentage of the surplus the person or business should receive in the event of a refund.

The idea is to increase productivity, because an increase in productivity drives prices down. The best way to do this is to give the surplus back to people the ASG took it from, since individuals and individual businesses do a better job of appropriating their monies to their most efficient uses. Any other method amounts to the age-old policy of “taking from Peter to pay Paul.”

Empirical evidence and economic models predict that a re-appropriation of the surplus – called government spending – will increase overall prices. Economic models, in this case aggregate supply and aggregate demand, predict that an increase in government spending will raise prices, everything else remaining constant. That is theory though, and it can get boring explaining it in detail. What is interesting is that empirical evidence of this theory is not far behind or obscure.

The reason an increase in government spending leads to inflation is because production has decreased by the time the government puts its money into the economy. The reason production decreases is because businesses and individuals are discouraged from producing more after taxation. If this was not true then you could tax businesses and people all day, and everyone would be happy. But as the battle over section 936 shows, federal taxation of the canneries will likely shut their productions down. This clearly shows how taxation discourages or even reduces production.

If the ASG uses the surplus to increase government employees’ paychecks, it can expect inflation to rise further. These price rises would normally encourage more businesses to come, but businesses are not stupid. They realize that the money government employees are using to pay for the goods are the taxes the ASG took from them. In essence, businesses are paying for their own goods. The ASG takes from Peter to pay Paul for Paul to pay Peter.

It is clear that after taxation production decreases, and by the time government spends its revenue, the ratio of goods to money levels have fallen, which creates perfect weather for inflation.

Government spending can circumvent these inflationary pressures if funding relies on borrowing money from abroad instead of printing more money or imposing more taxes, and the economy is open to imports. (More on this theory in a later post)

The ASG did pinpoint where our pocketbooks are hurting the most: the price of oil. But it is not the so-called “greedy” Saudis who are causing all of our aches and pains. Again, it all comes down to government taxes. For every gallon of gasoline, the federal government makes 18.4 cents while average state taxes hover around 23.6 cents. Who knows how much the ASG makes on its own cut? If the governor is sincere about lowering inflation because of “the price of oil,” he has approximately 42% to work with.


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