The Road to Serfdom - Economic Math

I'm on a trip to France at the moment, and reading the newspapers here, I came across an article that I think is somewhat relevant to a subject we are sure to deal with in this election year; namely; the economic impact of tax cuts or raising taxes.

Link to the article in the Int. Herald Tribune, which is actually a great source of news, assuming you are not addicted to Natalee Holloway or Britney Spears updates.



So, what I sense is a lack of understanding, from most of our candidates, about the impact on other things, that some of their suggested programs will cause. Nothing exists in a vacuum and everything in economics, affects other things in the economy, especially taxes. What the article describes, is the unintended consequences of the 35 hour work week that the French left was so proud of. In attempting to lower the amount of working hours in a week, from 40 to 35, to ease the supposed strain of working a full five days, the government created conditions that raised inflation, and lowered pay. Why? Well, because the result of lowering the number of hours each worker was available, caused employers to have to adjust their hiring practices accordingly (slight increase in hiring) to cover the unworked hours. But because the move was done in a vacuum, and was not accompanied by a lowering of the restrictions on part time employees, and on short term employees, the employers ended up having to spend more. As a result, they started exporting jobs to Asia or Eastern Europe in greater numbers, and used that leverage to freeze or limit wages increases, all the while inflation was climbing.

My point is this; the simple math of (less hours per employee, causes employer to hire more people, causes a drop in unemployment) does not reflect the REALITY math of the effect it actually has on the economy. Nothing exists in a vacuum.

So, back to out taxes in the US. Ask your average American the question, "If we lower the tax rate, does the government have more or less revenue?" and they will answer, "Less of course." That is because in simple math, the equation looks like;

X(% of tax rate) multiplied by Y(Money of taxpayers) = Z (tax revenue generated)

But again, nothing exists in a vacuum, so the above equation does not compute in the real world. EVERY single time the tax rate has been dropped, the government has seen an increase in revenue (unfortunately cancelled out by increases in spending, usually). How is that possible? Well, the real world, with its cause and effect paradigms, causes several things to happen when the tax rate is lowered.

1. Employers are able to hire more people, which increases the number of people paying taxes, and hence the amount of money of the taxpayers (Y).
2. Less people cheat, because the risk to reward ration decreases, again increasing the pool of money (Y)
3. People spend and invest more, stimulating even more economic activity.

Now, I agree that this is a slightly more complex idea than raise taxes or lower taxes to pay for things, but isn't it the job of politicians to explain this to us during the debate process?

--Julien