David J. Bean

David J. Bean is a freelance writer living in California.

There are several fundamental economic facts that our politicians would not like the average person to know or understand. And the media, both print and electronic, either have not chosen to focus on them or are ignorant of the principals. The St. Croix Review has published many articles on this subject but the general public still seems unaware of the implications or doesn't care. The following is a very basic course in economics that will benefit everyone when they understand it. With that understanding perhaps some sanity could return to our national policies.

A nation's wealth is not the same as money. In a macro-economic sense wealth is what the nation's workers produce in terms of saleable goods and services. The total produced is expressed in dollars as the Gross Domestic Product (GDP). Money is a lien on the wealth that was produced. A dollar is an IOU that can be exchanged for a good or service of that value. Out of the total GDP, the federal government currently takes about 25 percent to provide for what it has spent on security, administration, healthcare, welfare, etc. Most often the government even spends more than it takes in any given year, the excess spending becoming a lien on future production. This excess spending is known as the deficit. When combined with state and local taxes the total approaches 40 percent. The government does not directly contribute to wealth production; it only consumes wealth. Of course keeping up the nation's infrastructure and many of the other government programs indirectly contribute to production, but the fact remains that the government produces no wealth; it is only a consumer of wealth. The federal, state, and local governments do not just take 40 percent off the top but use taxes that are applied to punish producers of wealth and reward non-producers.

The next basic concept is very difficult for the average person to comprehend: In the micro-economy, the day-to-day operations, the taxes used to allocate the rewards and punishments do not act as they seem on the surface. This is because businesses (and employees) do not pay taxes; they only collect them. Any viable business producing a good or service follows the equation: price + profit = price of the good or service produced. And cost = labor + material + rent + taxes. Yes, business costs to provide a good or service include the taxes assessed against that business and the people who contributed to the production of that good or service. These taxes go into the price of the good or service produced. Since the people working for that company get all their income from the company, and their taxes are paid by that income, their taxes also go into the price of the good or service produced. This trail of taxes proceeds all the way back to the very origin of the production process. Those same two equations apply to every business and all the people who had anything to do with bringing that good or service to market.

Look at the process used to bring a loaf of bread to market. Today one can pay over $4 for a loaf of good bread. The bread started out at the wheat farmer who grew the grain. He had it trucked to the mill by a trucking company. The mill company sent the flour on to the bakery and the bakery sent the finished bread on to the distributor who finally sent it to the grocery store where it could be purchased by a consumer. Every one of those businesses and the farmer had to follow the two equations above in order to stay in business. Therefore the consumer of that loaf of bread pays a one-loaf portion of all the taxes assessed against the businesses and workers that had anything to do with bringing the bread to market. These taxes are cumulative and therefore the major difference between $.25 bread and $4 bread is taxes.

Over the years the government has committed to funding on-going perpetual entitlement programs that present a constant and growing lien on the future production of wealth. The increase in spending by the government increases the amount of production (wealth) the government must take and thus results in even higher prices. This inflation depreciates the value of money used to purchase a good or service and has exactly the same effect as an additional tax. There is fundamentally no difference between a tax and inflation. They both reduce the real goods or services that money will buy.

So, think about that. In 1950 a loaf of bread cost about $.25 and today it costs $4 plus. Of course labor, material, and rent have all gone up too, but these increases are certainly also due to cumulative taxes. When you reflect that all the workers' taxes and all the business taxes are accumulated in the total government spending (federal, state, and local, about 40 percent of production), you can understand the rise in prices. The conclusion must be that the consumer of a good or service pays a portion of all the taxes assessed against all the people and businesses that had anything to do with producing that good or service. All of those taxes show up in the price of any good or service. Think too, of the implications of these facts on our current income tax laws and regulations. All these taxes are aimed at the micro-economy and what they do is punish the producers and reward the unproductive elements; in short, they redistribute the wealth earned by the producers. The current extensive income tax regulations only affect the market share or instantaneous advantage of one sector or another. They really are like rearranging the Titanic's deck chairs. Makes them sort of silly doesn't it? It seems that there should be much simpler methods of redistributing the wealth if that is a recognized objective of government.

Any reduction in prices not attributable to a reduction in taxes means true deflation of non-government's share of production. Deflation means that the future deficits cannot be paid off with depreciated dollars. This is why deflation scares the pants off politicians. *

"Public affairs go on pretty much as usual: perpetual chicanery and rather more personal abuse than there used to be . . ." --John Adams