Business as vacuum cleaner

Tax breaks for businesses, and the wealthy that own them, do not stimulate economic activity. Tax breaks for folks without enough to pay for the life necessities do stimulate economic activity. Tax subsidies directed at economic activity, i.e. point of sale credits and rebates, also stimulate the economy.

Often people view business (micro economic) decisions and governmental macro economic policy that affect those decisions without understanding how business decisions are made. There can be no other explanation for what now proposes to be sound economic policy regarding taxation. It is not only the right wing that believes that tax cuts will stimulate the business cycle. Many Democrats try to find a balance with business tax cuts and social service funding levels, without understanding that tax cuts to businesses will never revive a depressed economy, never increase hiring.

We can describe a business by using the analogy of business as vacuum cleaner. The vacuum is turned on when there are dollars to be sucked up. In that process the business uses energy, collects dust, and expends dollars to separate the dollars from the dust. The productive part of the business is the collecting the money, accomplished by hiring labor and purchasing materials of production from other companies, and providing demanded goods and services. The labor and materials are the dust and business tries to keep these costs to a minimum.

The important part about this analogy is that the purpose of the vacuum is to suck up money. Without the presence of money the business will not turn on, labor will not be hired, and materials will not be purchased. Of course there needs to be a minimum amount of dollars available or the business will just close up forever. But the issue here is how to stimulate a business to run more than it normally would given current depressed market conditions. Adding money directly to a business via a tax cut is simply adding more money into the vacuum cleaner without turning the machine on. Adding money directly into the vacuum is supply-side economic theory. It does not increase labor nor purchases of materials of production and it does not provide more goods or services. At best it rewards large and inefficient businesses. At worst it provides the wealthy dollars to create competition away from of our labor markets while increasing government deficits.

Demand-side economic theory attempts to get the vacuum to operate more, to suck up more money and dust. Consumption of dust, use of labor and materials of production is the point of demand-side theory. To accomplish this there needs to be more money in the general environment, it is called demand. One way to accomplish that is for government to purchase goods and services. Business will respond to this demand stimulus by turning on – hiring labor and purchasing materials – and sucking up those government dollars. Another means is for the government to directly place into the hands of people the dollars they require to fulfill their needs when they and do not have enough. This can be accomplished by direct cash grants such as unemployment insurance or general assistance payments, or by reducing tax withholding on lower wage earners. The important qualifier is that they are not able to fulfill their needs with their current income. Tax rebates for purchases, i.e. cash for clunkers and solar panel rebates, are essentially the government aiding the purchase of targeted goods and services by others.

Targeted tax breaks can be good for an economy and are sometimes required to increase economic activity. But across the board tax cuts only increase deficits, provide minimal stimulus, and will never pay for themselves.

A new way to view California's yearly budget process

Last night’s Marin Peace and Justice Coalition discussion of the California State budget forced me to reflect over our efforts of last year. Our fourth Monday forum, January 2010, was a great event. It provided a chance for many to talk back to an official and an opportunity to learn how the budget impacts our lives. But by the measuring stick of how we have moved our self-government forward it fell short. Here we are a year later and our Legislature and Governor are repeating the process again. This year’s Democratic scheme includes borrowing up to $9 billion and imposing a $1 billion oil severance tax to make the payments. Last year’s Democrats put Prop 14 on the ballot and gave away our ability to elect progressive members to State and Federal office.

Without diminishing our advocacy for services for those in need, for universal education, and gainful employment for all, (the list is long) I believe we need to broaden the conversation. Here are few ideas that have been kicking around inside my head for a while now.

I would like to propose that we use the momentum of this yearly event to craft something permanent, an action plan that will span many years, a document that envisions a sustainable lifestyle for all Californians, a budget that will implement it, and a revenue stream that will support it. The Green New Deal for the North Bay was a beginning example that needs to be built on.
[ http://www.greennewdeal.info/ ]

The specter of 12 percent unemployment, and that rate will be rising, makes me question why we tax labor at every point in our economy. The corporate right has convinced most of us that taxing capital gains is a double taxation of the same money, as in all profits are returned as dividends and are taxed as personal income at some point. But their point that all economic income derives from our collective economic endeavor is not far off the mark. Maybe we should be taxing based on revenues, as a measure of how much of California’s infrastructure is used. Let’s not tax labor any more than we tax the physical material used in production. Let’s not tax profit which rewards the inefficient. Let’s tax revenue and financial transactions as they represent use of the commons. We can use taxes on income, profit, property, sales, and resource use to balance our economy so as to encourage the productive sector that we will be relying on for most of our state budget.

I have spent all of my 62 years as a California resident. I remember the best educational system in the country and it was essentially free all the way through college. I remember that for most 40 hours of work was sufficient to provide for a family. Now it takes 80 hours or more. It is important that we not just focus on current economic schemes to avert this or that crisis but that we describe what life values we can sustain. Until we know what we want it is difficult to demand that our elected officials work for it.