Tuesday, October 4, 2011

How taxes regulations and madates kill an economy

You may know intuitively, that taxes and price controls and government mandates are bad for economic growth. But, do you know the mechanics of how they strangle an economy? It's really not that complicated, but experts like to use the lingo of the industry to make themselves sound much smarter than you. Here's an explanation in plain English.

Suppose you have a watchamacallit and I don't. You feel that watchamacallit is worth 20 cents. I believe it's worth 23 cents. There's a potential for a transaction there, created by our slight disagreement over the value of the watchamacallit. I could pay you anywhere from 20 to 23 cents and we'd both feel like it was a fair deal. Now suppose the government imposes a 5 cent tax on watchamacallits. To get the 20 cents you would need to feel good about parting ways with it, I'd have to pay you at least 25 cents. But I only think it's worth 23 cents. Transaction killed. Transactions that don't happen, don't show up in government statistics.

A tax of 1 or 2 cents may not have killed our transaction. There was still enough room in our margin of disagreement to make a deal. But when government gets too big, and demands too much, many transactions die and they get nothing.

Any third party mandate that adds cost to a transaction is a potential deal killer. Value is subjective. The point at which a transaction dies is totally up to the opinion of the buyer and the seller. You can't pass a law that makes me believe a whatchamacallit is worth more than I believe it's worth, and without putting a gun to your head, I can't make you accept less than you're willing to accept. Even if I put the gun to your head, how enthusiastic are you going to be about producing more whatchamacallits from that point forward?

Free markets means free people engaging in free trade in the absence of force. That last bit is why we need government. Yes, it has to be paid for, but the cost has to be low enough and the interference in the marketplace minimal enough that it doesn't kill the deal.

This is why companies go offshore. This is why small businesses don't expand. Third party add-ons make the risk/reward ratio too high. The government is trying to control too much, provide too much, take care of too much. It just costs too much. To add insult to injury, they aren't very good at it either.

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