Monday, April 27, 2009

Taxes greater than 50 percent --> Loss of National Competitiveness

So argues Andrew Lloyd Webber in an op-ed to the Daily Mail.

In business, prices are loosely based on cost. In order to remain in business, prices must be above cost. But how much above?

The answer is "what the market will bear." That is, people will pay what they are willing to pay. And generally, the higher the price, the less they will buy.

Thus what separates competitors is their individual unit cost of production. The business with lower cost will reap more profit, which attracts greater investment, which leads to greater growth of revenue-producing assets, which leads to more market share than the competition, which can eventually lead to the demise of the weakest competition (those with the lowest profit/highest unit cost).

Consider whether the same is true of government.

Government has more control over competition (tariffs, quotas, work visas), but these work on imports of goods and services. In a free country such as the United States, there is no restriction on the individual worker exporting themselves to a foreign country to work. (There is, however, a punitive tax on moving financial assets out of the country--for ten years, an ex-patriate must continue to pay taxes.)

Certainly patriotism must be considered as a reason workers dissatisfied with Government regulation and taxation do not leave despite their desire to do so. However, I consider it yet another abuse by Government when this patriotism is abused in order to trap the workers' assets and income for tax purposes.

Government can take a last bite out of those who flee, but ultimately cannot prevent the loss of workers or their talents (or the taxes that they pay).

State governments understand the competitive nature of taxation very well. If you are a big business, state and local governments will mortgage their future revenue streams in order to lure you. (Small businesses like mine are not so fortunate. We end up making up for the subsidies to bigger businesses.)

The national government usually does not need to consider competition. Yet in times of high taxation, worker flight is inevitable. They will take their talents, capital and their income with them.

National Governments, take heed!

Friday, April 24, 2009

Keynes v Hayek

Roger Garrison of Auburn University has put together three fantastic PowerPoint presentations demonstrating Keynes' Circular Flow Theory and Hayek's Means-Ends Analysis and how they work together in a more sophisticated way than Keynes envisioned to explain Boom-Bust cycles and the dangers of monetary intervention.

In my opinion, Keynes was right to identify the Paradox of Thrift, but he was wrong to rule out possible mechanisms for undoing the paradox. Hayek showed clearly how to resolve the problem, but Keynes was dismissive. It seems that Hayek's explanation did not fit Keynes' world view.

Most of what economists do well is qualitative analysis. They generally disagree when numbers enter the picture, and you should be skeptical of any claim to forecast the economic future. But do learn economic principles and the qualitative effects that are described by these principles. Use your own experience and be your own judge as to the magnitude of each effect and whether they reinforce or cancel one another.

Doing so is another step on the road to living intelligently in a world of humans that does not always act or react rationally.

Physics Joke Winner

The winner of the first round of the Reverse Joke contest was number 4.

4. It's a Schroedinger's Cow problem. The milk is in the pail if you don't look in it. (JM)
Round two has begun, and the following entries are in contention:

1. Why do dairymen sell so many empty buckets to blind people? (JM)

2. What did the bad magician say after his famous "milking the invisible cow" trick failed? (ST)

3. What did Charlotte say to Wilbur when she did not cry over spilled milk? (JM)

4. What the milkmaid told her father after the "Counting Chickens" incident. (CT)

Tuesday, April 21, 2009

Finally, true images of Saturn

These images of Saturn are phenomenal!

Rings, moons, moonlets, gravity distortions of the rings, unusual above-plane formations in one of the rings....

Produced by the Cassini Spacecraft in orbit round Saturn.

Friday, April 10, 2009

The Business, Professional, & Occupational License (BPOL) Tax: Facts and Economic Considerations

I wrote this analysis back when Stafford County was debating swapping their Merchants Capital Tax for the Business, Professional, & Occupational License Tax. I've tried to be as qualitative as possible regarding effects, and I must caution in considering effects that any one effect rarely occurs in isolation. Other effects can reinforce or mask any effect I mention below. That does not mean that the effect did not happen. It just means that our ability to measure it independently may be limited or non-existent.

I am accustomed to paying the BPOL as a business owner. I am well aware of the effects of this tax and other taxes on my ability to adjust prices. It is important to remember that prices are related to costs, but that prices are pushed down by external factors like competition, substitution effects, and individual assessment of benefits. That is to say, the market determines the price. My analysis touches on this problem by separating goods and services according to their "price elasticity of demand". The bottom line is that some businesses are hurt by the BPOL, and some are not. My own business is not hurt by the BPOL, but I am also a consumer of goods and services and understand the costs of providing them.

Jerry Logan (Spotsylvania Supervisor) is not a fan of the BPOL and has been trying to build support for changing or eliminating it (ht Dan Telvock, here). Supervisors and citizens should be well-informed of the characteristics of this tax before they speak for or against it and before they suggest modifications. In politics, it seems that Unintended Consequences are rarely considered, even though they are easily forseeable (e.g., making food into fuel causing food prices to spike around the world). At least do the homework and try to limit the Unintended Consequences!

The BPOL Tax is similar to the Retail Sales Tax, except

  • It taxes services as well as goods;
  • The rate differs according to the type of business; in Spotsylvania County,
    • 0.0025% for wholesale merchants
    • 0.08% for contractors
    • 0.10% for direct sellers, itinerant merchants and peddlers, and retail merchants
    • 0.18% for amusements, business services, developers, miscellaneous, photographers, personal services, rentals, and repair services
    • 0.29% for financial, real estate, and professionals
  • The tax is not shown on invoices or sales receipts;
  • There is a threshold below which taxes are not collected nor returns filed;
    • Spotsylvania: $200,000
  • There is a standard deduction that reduces the tax liability;
    • Spotsylvania: $50,000 [1]
  • It does not matter whether the business is profitable or not;
  • Annual limits on the amount a business is liable to pay reduces the effective tax rate for that business;
    • Spotsylvania: $150,000 [2]

Consumers ultimately pay the BPOL Tax.

  • Cash flow in a business ultimately comes from only three sources:
    • Investment by owners
    • Borrowing from creditors
    • Revenue from consumers
  • Owners do not add new money to pay the BPOL;
  • The business does not borrow from its creditors to pay the BPOL;
  • Therefore, the BPOL is paid from revenue, just like all other business expenses.
  • Not all consumers are county residents. This is an important part of the decision whether to tax capital or revenue.

Businesses and Government in the County incur additional cost to collect the BPOL tax if it does not replace an existing collection effort.

  • Businesses must file annual returns stating their revenue derived in the County;
  • These returns must be handled, processed, and stored by the government;
  • The government must send out reminders to report revenues;
  • The government must send out invoices to collect the tax;
  • Businesses must pay the tax invoices;
  • The government must pursue late or missing payments;
  • The government must pursue and prosecute non-filers;

The BPOL tax system collects data on business activity for every business over the filing threshold.

  • The government can derive measures of economic activity from the collected data;
  • The measures of economic activity can be combined with other sources such as Retail Sales Tax reporting to obtain estimates of economic activity in below-threshold retail goods businesses;
  • Service-businesses below the filing threshold must be measured in one or more other ways;

To the extent that the BPOL tax is greater than the tax(es) it replaces, micro-economic activity might fall, in some cases temporarily, in others, permanently.

  • To pay for the net tax increase, businesses will raise prices and accept lower profits in varying proportions;
  • Prices have variable measures of elasticity:
    • Sales revenue of relatively inelastic goods and services will rise when prices rise;
      • “Goods and services that are more essential to everyday living, and that have fewer substitutes” are inelastic; [3]
      • Lower profits are less likely to result, since prices may be increased to cover a greater share of the BPOL tax without causing an equal or greater magnitude adverse effect on demand for goods and services;
    • Sales revenue of relatively elastic goods and services will fall when prices rise;
      • “Goods and services with many substitutes, or that are not essential [to everyday living], have higher elasticity”; [4]
      • Lower profits are more likely to result, since prices may not be increased due to the adverse impact on demand for goods and services;
  • To the extent that sales revenue of inelastic goods and services is greater than sales revenue of elastic goods and services, net tax revenues will increase;
  • To the extent that sales revenue of inelastic goods and services is less than sales revenue of elastic goods and services, net tax revenues will decrease;
  • Producers of elastic goods and services will suffer the greatest adverse effects, since the market will not readily bear higher prices, with lowered demand reducing sales revenue more than higher prices would have increased it; (Pi x Qi >Pf x Qf, where “P” is price, “Q” is quantity, “i” is initial value, and “f” is final value).
    • Reductions in aggregate demand reduces the growth rate of producers;
    • If the growth rate becomes negative, then producers must shrink;
    • Producers that must shrink will choose from a variety of methods to reduce costs:
      • Substitute lower-cost supplies or labor;
        • This can result in reduced consumer choice or product quality;
      • Reduce labor hours or staffing;
      • Sell non-productive assets
        • Sometimes at a gain;
        • Sometimes at a loss;
      • Delay purchase or lease of new or replacement assets;
    • Those producers that must shrink below their ability to remain viable will close;
      • This will result in
        • Reduction in consumer choice;
        • Less price instability as a new equilibrium point is reached;
        • Lower employment within a given industry;
    • To the extent that laid-off workers are immediately unable to find re-employment,
      • The government will incur the cost of unemployment benefits;
      • Retail sales tax revenue (and similarly BPOL tax revenue) growth will fall while laid-off workers curtail discretionary spending;
      • Property tax revenue growth will fall while laid-off workers curtail durable goods spending;
      • The risk of foreclosure and eviction will increase for laid-off workers;
        • Foreclosures adversely affect property values, thereby reducing real estate tax revenue growth;
    • If, as in the past, aggregate wages increase at a greater rate than prices, then macroeconomic activity will recover; however, the change in the makeup of producers and consumers and the level of innovation that occurs in the interim makes the specifics of this recovery less predictable. It might or might not result in increased employment or increased business and tax revenue.

The BPOL Tax is willfully ignorant of the business's profitability

  • This is likely due to the difficulty of taxing businesses that do not derive 100% of their revenue (and therefore profits) within the county.
  • For instance, big boxes like Walmart and Target are multi-national companies. How do you tax their profits derived solely from doing business in Spotsylvania County?
  • Revenue is the only measure other than assets that can be allocated accurately to the county level.

Maximum Revenue Taxed Under the BPOL

  • The maximum revenue taxed differs according to the type of business; in Spotsylvania County,
    • $60 billion (in gross purchases) for wholesale merchants
    • $187.5 million for contractors
    • $150 million for direct sellers, itinerant merchants and peddlers, and retail merchants
    • $83.3 million for amusements, business services, developers, miscellaneous, photographers, personal services, rentals, and repair services
    • $51.7 million for financial, real estate, and professionals
  • The rationale behind the differing amounts and the differing rates is not clear, and are subject to manipulation by special interests.
    • In New Mexico, which has a had a statewide BPOL for more than 40 years, there are concerns over special interest carve-outs and “tax pyramiding”, wherein taxes are levied again on goods or services on which taxes were already levied at an earlier stage of production. [5]

[1] For businesses with less than $1 million in gross receipts.

Wednesday, April 8, 2009

What is the joke to these possible answers?

1) Consider a spherical cow [in a vacuum]. (JM)

2) Consider a frictionless cow that lactates uniformly in all directions. (ST)

3) Perform a small-scale test using a Gaussian goat and a Poisson pail. (CT)

4) It's a Schroedinger's cow problem. The milk is in the pail if you do not look at it. (JM)

5) Consider a cow traveling at the speed of light. A stationary observer is standing by. It follows intuitively that accidental cow tipping will undo creation. (CT & AT)

6) (Inexplicably missing)

7) Consider a cow suspended by a linear spring. (JM)

8) Imagine a cow sliding down an inclined plane with coefficient of sliding friction 0.2. (ST)

9) Okay, assume three unit cows are orthogonal to each other. (JM)

10) Okay, haven't you guys ever heard of evaporated milk? (JM)

11) A cow enters the event horizon of a singularity. One result certainly is condensed milk. (CT)

12) First use Schwartzchild's radius and look for black holes. (TC)

Monday, April 6, 2009

Making growth pay for itself

Dan Telvock of the Free-Lance Star writes in his blog about an op-ed written by Clark Lemings, a land-use attorney and founding member of the Stafford Council for Progress. Mr. Lemings has an idea that residences above a certain value do pay for themselves without need for subsidies from local government.

It is a common refrain that growth should pay for itself. But what does that mean? What is the cost of growth? How is it paid for now (if it is in fact completely paid for ever)? Who pays for it?

The existing county residents don't want to pay additional taxes to cover new (or expanded) roads, utilities, schools, libraries, etc., that are necessary to support new residents. New residents (and the developers who seem to do the building for most of them) don't want to pay high impact fees just to gain access to those same roads, utilities, schools, libraries, etc. How should local government untie this Gordian knot?

It occurred very quickly to me after reading this that the answer lies in accounting. Not the cash-based accounting in which government budgets are usually presented. No, the answer lies in accrual-based accounting. If you will pardon the pun, accrual-based accounting uncovers the lies politicians tell us when they present the budget. I'm not sure these are intentional lies, but rather are lies borne of ignorance to the nuances of accrual-based accounting.

So, without explaining accrual-based accounting in this post, let me explain how it helps us solve the cost allocation problem for new growth. Unfortunately, I do not have the figures I need to show this quantitatively, so I must confine myself to a qualitative discussion of the process.

First, the expenses of the county on an accrual basis include depreciation and exclude capital purchases and principal repayment on debt. You cannot talk about the cost of new assets (or of improving existing assets) without including depreciation.

Consider for this argument a limited situation. Only residences use public utilities and services, and the real estate tax is the only tax. (The concept is easily extendible to businesses. I leave that to the reader.)

If you divide this total expense figure by the number of existing residences, you get the average cost per residence of public utilities and services. This is the minimum average real estate tax that you must place on each residence. (You have to charge more if there are principal repayments on existing debt or capital purchases not funded by debt issuance.) As Mr. Lemings asserts, under these limited circumstances residences that are taxed above the average amount pay for themselves.

Assuming that all existing public assets have remaining capacity, you can add new residences at will without incurring additional cost. The advantage to existing residences is greater sharing of the costs, which means a lower average cost per residence, which should mean lower taxes per household. It is reasonable to expect new residences under these circumstances to "buy into" the existing public assets.

But what happens when existing public assets do not have sufficient remaining capacity--i.e., the water treatment facility must be expanded, or a new well is needed, or a new school must be built, etc.? Who pays for the new assets, how much, and why?

In reality, most new or expanded facilities benefit existing residences as well as new residences. The solution is to allocate the cost fairly among these two groups.

Public facilities have a design goal of supporting a planned number of residents, who arrive to occupy new residences or else accumulate the usual way in existing residences. The cost of the facility construction or expansion then is allocable in an estimatable way before it is even constructed!

It is not difficult to compute the cost allocable to existing residences versus new residences. If a facility supports 10,000 residences, and 8,000 are currently using it, then 20% of the cost of the facility should be paid for by the next 2000 new residences that will use the facility.

Start with basic principles.

1) New residents should compensate existing residents for any capital loss due to early retirement of existing facilities due to replacement.

2) New residents should pay their portion of capital costs (including financing) for new or expanded facilities (assuming that the facilities were adequate for existing residents beforehand).

3) If the new residences will not be built all at once, then the real cost (accounting for inflation) of (1) and (2) must be recovered over time, with the outstanding balance being adjusted upward for inflation each year. In nominal terms, more cash will be recovered than initially layed out for the public facilities; but in real terms, the recovery will approximately equal the initial outlay.

4) If growth stops, then existing residences must finish paying for the new or expanded facilities, and future new residences must "buy into" the facilities.

5) Implicitly, every existing residence represents ownership of existing assets. Treat them the way you would treat owners of assets held by shareholders of a non-profit corporation.

There are two ways of recovering the costs. The first is through impact fees on new residences. The second is through a cost recovery district that levies a special real estate tax on new residences.

First, the impact fees. This fee sums up the new residence's cost all at once and up front as it is approved for construction. Depending on the costs being allocated, this could be a large and unwieldy sum. The fee would necessarily be increased annually to keep the real value of the cost recovery neutral with the initial outlay. If the number of new residences does not meet the planned amount, then the full cost will not be recovered.

Enter the cost recovery district. Approved lots are placed in the district. Costs for new or expanded facilities are allocated to the district. No matter how few or how many residences are built, no matter how long it takes to build out the residences, the district pays an additional tax to recover the initial outlay. The tax ends when the costs are paid. At that point, these new residences become "existing residences" and are subject to compensation by new residences who add their use to existing facilities.

There are additional benefits to a cost recovery district. Take for instance a senior community. These residences do not demand schools, and therefore should not have to "buy into" existing schools, nor share in the capital cost of new schools. The allocation for these residences can be lessened, leading to a faster satisfaction of costs, and lower annual costs of living for retirees.

Costs can be allocated narrowly to parts of the county (like specific subdivisions), or broadly by applying a county-wide cost recovery district. These districts should be layerable, so that each recovery goal is separate and time-limited (that is, it has a finite life). Each incremental investment decision can be weighed on its own merits, and the costs can be recovered more easily from those who enjoy its benefits.

Finally, debt issuance and service can be tied to specific cost recovery districts, dedicating revenue streams to repayment. Transfers from the general fund to cover cash flow shortages due to slower than planned growth can be properly accounted and repaid to the general fund when applying principles (3) and (4). This can improve the likelihood of receiving favorable financing terms.

In conclusion, it is possible to estimate and allocate the costs of growth. Furthermore, there are means to recover these costs fairly from the existing and new users of public assets. With a little financing assistance from the general fund, even long-duration development costs can be recovered fairly. The idea is to ascribe ownership to existing residents, and to make new residents smartly "buy into" existing assets, and pay their portion of investment in new or expanded assets.

In praise of Dan Telvock, FLS reporter

One of my first ideas for a blog two years ago was to cover Spotsylvania County government, especially with a small business slant, because I felt that the Free-Lance Star, our local paper, was doing a poor job.

Enter Dan Telvock, who joined the FLS staff as a reporter and was given the Spotsylvania beat. This man got into local goings-on and provided the information I had felt was missing. Not only does Dan write articles for the FLS, he also maintains a blog on the FLS website, into which he puts most of the information that he can't get his editor to print.

Thanks to Dan, I get the information I want and the opportunity to add my two cents in the comments of his blog entries. Twice now, I have gotten ideas for blog entries of my own from his blog (confirmed at least once by Stafford County studpidity), but didn't have my own blog yet in which to put them. The best part is that I don't have to do the primary research. Truth is, I never had time to do it myself, and don't now either, and Dan does a much better job of it than I ever could.

So, Dan, here are two topics that are going to go into this blog really soon. (You've seen them touched upon in your comments section, so I will be going into more detail now that I am not confined to 812 characters per post.)

1) Local taxes. Specifically, I'll show a qualitative economic analysis (with a couple of quantitative examples) of the Gross Receipts Tax levied on businesses as part of business licensing.

2) Making growth pay for itself in a reasonably fair and balanced way.

The first will be from the points of view of an economist and a small business owner. The second will be my inner accountant and economist coming out to 'splain things.

If the Spotsy supervisors ever take up the GRT, then hopefully I can provide you with some hard analysis with which to question them.

In the meantime, keep up the good work, Dan, and I'll keep reading and ruminating.

Sunday, April 5, 2009

Random Thought

Kathy and I had a picnic by the Rappahannock River this fine evening. The water is high and fast due to heavy rains we have experienced recently. It is also very clouded with silt.

Well this got us thinking! Does a fish in fast-moving silty water experience something similar to a human in a sandstorm in the desert? Does it hurt? Does it damage their eyes, mouth, gills, or skin? Does is impact respiration in the gills?

The wading birds were also in the water, which made us wonder how they catch any fish when they can't see through the water. Is this a catch-22 for the fish?

Saturday, April 4, 2009

Our Agrarian Roots

Kathy and I re-watched "Seabiscuit" tonight. This is a movie about how a strong heart (figuratively speaking) can bring about unexpected success. It is also about trust and friendship, and second chances.

Horses have been an enabler of mankind's mobility for thousands of years. The ascent of trains and automobiles relegated horses to dwindling numbers of farms and ranches, and more a plaything of the monied than a mainstay of modern civilization.

The character of Charles Howard, Seabiscuit's owner, becomes wealthy selling automobiles in San Francisco, yet goes on to put faith in a small horse's ability to be great; always looking to the future, yet drawing comfort and passion from the past.

Will we come to a time where some humans no longer know or understand the natural world, nor remember its history, having grown up within a completely manmade environment? What are the consequences of this disconnect with the natural world on the decisions and actions of these who are ignorant of the division between the works of nature and the works of man?

What are the consequences on the artistry of these people? They may well know the paintings, sculptures, plays, operas, symphonies, etc., that are the hallmark of man-made fine art, and derive maximum pleasure from creating or admiring these works. Are they any less pleased for having never seen ten thousand verdant leaves shimmering in the summer breeze, having never heard the waves thundering ceaselessly upon the ocean shore, having never smelled the lasting fragrance from a bed of vividly painted flowers? Is it really just a case of, "To each, his own?"

We are steadily moving away from our agrarian roots. Only two percent of the U.S. population now live and work on farms, twice as many as are actually needed. The rest live now in cities and suburbs. There are people in cities who have grown up having never seen the Milky Way, much less only a few of the brightest stars. How does this impact our national attempt to return to our Moon? How does this affect their understanding of history, lived and recorded by men and women who were less mobile, less connected outside of their home towns, and less aware of scientific truth concerning the world in which they lived?

When we become disconnected from the natural world and our own history within it, how do we know when we are doing the right thing in the future?

To one thing constant never...

The name of this blog comes from Shakespeare's "Much Ado About Nothing", quoted here:

Sigh no more, ladies, sigh no more
Men were deceivers ever;
One foot in sea, and one on shore,
To one thing constant never.
Then sigh not so,
But let them go,
And be you blithe and bonny,
Converting all your sound of woe
Into Hey nonny, nonny.

My goal in writing is to cover a broad range of subjects ("To one thing constant never") and to find humor ("Hey nonny, nonny") even on topics that ordinarily make me angry ("all your sound of woe").

I expect some posts will be superficial and worthless, serving only my self-interest. Others, I think, will be more revealing and thought-provoking.

You may find math, economics, philosophy, religion, politics, art, poetry, photography, astronomy, and more. These are my interests, and I want to share them in a manner that respects your interests above my own. I don't want to push this through email to my friends; I'd rather you pull it at your leisure.

So with that firmly established, let us begin.