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Sunday, September 27, 2015

One Way Raising Taxes Stifles Growth

If Sam Walton were alive today, he would be the richest man in the world, and his riches would actually pale the worth of Bill Gates' fortune by a lot. The total wealth of the Walton family as of January of 2015 was $147 billion. Gates is only worth about $80 billion by comparison. I would even venture to guess that if old Sam was still at the helm, the additional wealth he would have accumulated would have put him closer to around $200 billion. The "kids" don't have the vision and business prowess that Sam Walton had, and his empire would be larger by leaps and bounds without a doubt.

But there is a hidden message in the success of Walmart that anyone should be able to recognize. Set aside how Walmart conducts business. Or the effects positive or negative that Walmart has on other businesses. That is for another discussion. The key here is understanding one simple concept. The more money people have to spend on goods, the more goods they will buy. Sam Walton was not a man who gave a lot of consideration to margins. What he considered was volume. And he understood that if he could create volume, he would have more ability to increase margins. The volume of goods and money flowing would make the whole process more profitable. And his ideas are still well in play today.

Enter the idea that if you raise taxes, you increase revenues.

Democrats and liberals are huge fans of simply taxing as much of any money flowing in the marketplace as they can, having the simple idea that if you take more you'll get more. But this is largely because most of these guys are of course politicians. Not businessman. So they really have no idea how money really works. Incidentally, the majority of Americans are not businessmen either, and they know about as much about how money works as the politicians do. So when they hear "tax the rich," and "tax the corporations," they actually believe that this does something positive for the economy, and in some odd sort of way they think it helps them out as well.

The truth is that it actually hurts everyone and there is one simple thing to keep in mind to really begin to understand the effect of higher taxes on everyone. The rich, the middle class, and yes. The poor as well.

Cost slows things down. The more something costs the less people will buy it, do it, or work for it. It is really that simple. Taxes are cost. Let's get that straight right away. Taxation adds cost to earning money. And the more something costs, the less of it will happen.

The most recent example of this effect was of course gas prices. As gas was hovering around $5 per gallon, people suddenly drove less. The median national miles driven went dramatically down. The number of gallons of gas consumed also went down. People did drive less. But they also ditched gas guzzlers for more efficient cars. People directly changed their behavior and their spending based on the price of a gallon of gas. The more the gas cost, the less people used it.

The oil companies did not make more money ultimately. The states did not collect more highway taxes. It was really a zero sum gain when all was said and done. On top of everything else, the more people had to spend on what gas they did use, the less they spent on other things in the marketplace.

People took less vacations. People reduced discretionary spending on clothes. They spent less as a whole on everything. Higher prices at the pump slowed everything else in the economy down. The entire economy suffered. No one gained anything at all. In addition to that, higher gas prices also caused a rise in everything else in the economy slowing things down yet further.

Delivery charges were added to order out. Extra fees were added to flights. Prices on other goods and services rose as well since it cost more to move things around, and for service providers to get to customers.

A guy who sells strawberries can wake up one morning and decide that he wants more money for his strawberries. He can raise the price to accomplish this. But, if he raises the price too much, people will simply buy less strawberries. He will make less than if he kept the strawberries the same price, and actually if he had lowered the price a bit, he'd have made more money in total revenue even though he made less on each strawberry sold.

Again enter Sam Walton who understood this very basic concept. A concept that many Americans, and certainly the government fails to understand fundamentally.

You can raise taxes to whatever percentage you want. The end result is that you will get more per dollar, but less as a whole. Less dollars will ultimately be earned. Higher taxes equal lower revenues because it slows down the process of earning and spending.

If you want to increase tax revenues, the best way of accomplishing this is by leaving more money flowing in the real economy and reducing the cost of earning. The higher the volume of money flowing freely in the marketplace, the higher the total revenues you will collect as a result of it.

1 comment:

Keesha Metcalfe said...

This is an interesting analogy that you make between Sam Walton's philosophy of pricing and the government's idea of pricing Jim. You are right. There comes a point when it becomes a case of being penny wise and pound foolish to increase taxes to the point where people make deliberate efforts to avoid taxation. The key is to find that point of profit maximization rather than income maximization. I think the powers that be need to read your article!