The economic
impact is equally or more dramatic than the surpluses per capita. It includes
increased earnings, reductions in taxes, tremendous job creation, wealth
creation, increases the standard of living of everyone and more.
When governments lower taxes, government
revenues increase.
You say how can
that be? Governments raise taxes to increase revenues. Then lowering taxes
should decrease revenues, right? WRONG!
Here is a story of
what was discovered in 1815 in England after England vanquished Napoleon and
ended up with a debt burden equal to 200% of Gross Domestic Product (GDP). This
historical story was presented in Barron's issue of December 4, 2000 and was
written by Stephen W. Shipman, portfolio manager and director of research for
George D. Burman & Associates in Los Angeles.
After the French
wars with the return of the British troops and subsequent demilitarization, a
surplus emerged. Thus began the modern era's first great debate over tax cuts and debt reduction.
After much debate
and wrangling among the British politicians, along the
same lines as we see today, it was decided to return the surpluses
to the people by reducing the high taxes necessary to sustain the war effort
instead of paying down the debt. But the reduction was not only in the income
tax but in many taxes that were imposed on the total population.
The British
economy boomed and revenues barely receded. They had enough to make the
payments on the debt. So they decided to try lowering taxes again and again
revenues increased because of the explosive economic boom.
The result was tax
reductions of surpluses rather than paying down the debt provided more benefits
than just paying down the debt with the surpluses, because the government
received more revenue because of the increased economic activity. Mr. Shipman
stated:
"Clearly all
evidence suggest and the record demonstrates that Great Britain's phenomenal
economic expansion following the French Wars derived from a policy mix that
favored top-line production over balance-sheet austerity. The people of
Britain, its laborers and entrepreneurs alike, responded by creating so much
wealth that the government never again really worried about its debt
burden."
Mr. Shipman goes
on to state that it is "...ludicrous to oblige
American taxpayers to ..." pay off the debt when the size of the
debt compared to the British debt at the time is so
small.
Hence, the
statement that when governments lower taxes, the governments revenues increase
was born and proven in the real world starting in 1815.
In addition, this
effect/results has been immortalized by Dr. Arthur Laffer who created the
Laffer Curve theory during the Reagan administration. Contrary to what you may
have been told, the application of this principle worked. Taxes were reduced
and tax revenues increased. The story being told is that government deficits
occurred because of the tax reductions. This is a lie. Government deficits were
created because Congress spent the increase in tax revenues and a great deal
more.
However, we shall
in this section and in other parts of this site
prove with specific easy-to-understand economic principles how
the above statement becomes true. But even better than reducing taxes is to
provide cash refunds of surpluses equally to each person.
The economic
impact is equally or more dramatic than the actual surpluses per capita. It
includes increased earnings, reductions in taxes, tremendous job creation and
more.
Remember what
Alan Greenspan, Chairmen of the Federal
Reserve, said in his testimony to the Senate Humphrey-Hawkins
Committee in late July 1999, ...My experience is
that private rates of return are significant higher than the governments
rates of return.
This economic
impact analysis will prove mathematically what was explained above. However,
our approach to refunding the potential surpluses is not the supply-side
(trickle-down) approach, but what we call the trickle-up
approach.
We used Economic
Output Multipliers (EOM), Economic Earnings Multipliers (EEM),
Government Revenue Rate (GRR), Government Investment Ratio (GRI), and
Employment Ratios (ER). Actually these items can be found in any elementary
economics textbook and are really very simple principles. These principles are
fully explained below and shown in the Section on our review of selected
CAFRs.
Investing
Investing is spending or setting aside
money for future financial gain. For an
individual, investment might include the purchase of financial assets, such as
stocks, bonds, mutual funds, or life insurance. In government accounting
investments are "assets" such as "Cash and
Investments", not revenues or expenditures.
As will be shown below these assets are set aside for the future income to
be received from the investments and not
needed for current operations of the government.
Therefore, by
accounting definition the cash and net investments
in the balance sheet of governments are mostly excess funds and
potential surpluses not currently needed to carry out the functions of the
government.
The Economic Impact Analysis
These are economic
principles which can be found in almost any elementary economics
textbook.
Economic Output
Multiplier (EOM)
"Basic to all
theories of business-cycle fluctuations and their causes is the relationship
between investment and consumption. New investments have what is called a
multiplier effect: that is, investment money paid to wage earners and suppliers
becomes income to them and then, in turn, becomes income to others as the wage
earners or suppliers spend most of their earnings. An expanding ripple effect
is thus set into motion.
Similarly, an
increasing level of income spent by consumers has an accelerating influence on
investment. Higher demand creates greater incentive to increase investment in
production, in order to meet that demand..." ("Business Cycle," Encarta®
1998 Encyclopedia © 1993-1997)
Another
explanation: The EOM estimates the change in output for a given change in
demand, i.e., a certain demand (returning surpluses) increases the output of
all industries in the government's economic area after all "rounds" of spending
are totaled.
After researching
EOM data from the Department of Commerce, Bureau of Economic Analysis (BEA),
and other sources, it was decided that an EOM of 2.00 is about the average that
can be used for all governments.
This means that
for every $1 of surpluses returned to the people, the economy expands by a
certain number of dollars. For example if the economic multiplier is 2.0:1,
this means that for every $1 returned to the people in a certain taxing
jurisdiction, the economy in that jurisdiction will increase by $2.00.
Economic Earnings
Multiplier (EEM)
Increased demand
(surpluses) increases labor demand in all industries, resulting in increased
wages paid for everyone in the government's economic area.
This is the total
dollar change in earnings of households that results from a $1 change in output
delivered to final demand.
In a recent Wall
Street Journal article the impact of increasing or lowering taxes (returning
surpluses) was shown when it stated, "Richard Vedder, an Ohio University
economist, estimates that on average a 1% increase in state and local taxes
lowers personal income by 3.5%." Conversely, the returning of surpluses, more
than just a lowering of taxes, will increase personal income more than the
3.5%.
Again, research indicated,
including considering the Department of Commerce, Bureau of Economic Analysis
(BEA) data on its RIMS II economic model, that an EEM of .50 should be used.
Government Revenue Rate
(GRR)
This is the
amount of revenue collected by a government per dollar of economic activity in
the government's area of jurisdiction. This will provide the percent of return
the government is receiving per dollar of economic activity.
We use a GRR of
10.00% for States and 8.00% for local governments. This means for every $1 of
additional economic activity a State government receives 10.00 cents and a
local government receives 8.00 cents in revenue. The Federal government
receives 20 cents on each $1 of Gross Domestic Product (GDP).
Government Rate of Return on
Investments (GRI)
This is the
interest rate that the government receives on its investments excluding the
return on retirement/pension plans investments which can vary considerably
because of the type of investment.
The current GRI
for the average government is between 5-6%. Most of the potential surpluses are
in the government funds that receive this GRI. However, the retirement funds,
universities, and a few smaller funds/entities are allowed to use the "prudent
person rule". This means they can invest in stocks, bonds, foreign currencies,
foreign stock, etc., which the normal government funds cannot. However, usually
a much smaller amount of the potential surpluses are from excesses in these
funds/activities.
Increase in Tax
Revenues
As has been
stated above returning potential surpluses increases the economic activity in
the government's economy . With the government receiving 10.00 or 8.00 cents on
every $1 of economic activity, the government will receive considerably more
(from about 10% to about 14%) above what the government would receive if the
surpluses were invested by the government (GRI). For the Federal government it
is pure profit of about 40 cents or 40%.
Reduction in
Taxes
Because of the increased revenues the government can reduce future
taxes.
In
addition, the activities/taxes/etc. that created the surpluses in the first
place could be changed so that surpluses could not build again. This in itself
will reduce taxes even further.
Employment Multiplier
(EM)
This is the job
creation amount. It is the amount of additional economic activity necessary to
create one additional job. Although research disclosed that the range was
between $45,000 and $75,000, we decided to use $100,000 as the amount needed to
create one additional job.
Summary of Economic Impact Data
Here is a summary of what the above economic impact indicators
mean.
1. |
|
Economic Output Multiplier (EOM) |
|
|
For every $1 of
refund to the people the economy grows by $2. |
2. |
|
Economic Earnings Multiplier (EEM) |
|
|
For every $1 of
refund the wages increase by $.50. |
3. |
|
Increase in Federal revenues |
|
|
For every $1
increase in economic activity the Federal government receives $.20 in
additional revenues. |
4. |
|
Increase in State revenues |
|
|
For every $1
increase in economic activity the State governments receive $.10 in additional
revenues. |
5. |
|
Increase in Local revenues (City and
County) |
|
|
For every $1
increase in economic activity the local governments receive $.08 in additional
revenues. |
6. |
|
Employment Ratio (ER) |
|
|
For every $100,000
in increased economic activity, 1 job is created. |
Unemployment and
Welfare
Because of the
increase in employment, unemployment and the costs of unemployment would be
drastically reduced thereby reducing the tax burden for these costs. Likewise,
with the increase in employment opportunities and wage increases, the welfare
recipient may decide it is more profitable and easier to get a job than remain
on welfare. This also will decrease the welfare costs to the
taxpayers.
An Example of the
Principles
The State of XYZ at the State-level has approximately $42.40 billion of the taxpayer's money it is not
using, i. e. surpluses equal to $3,703 for
every man, woman and child in XYZ or $14,811 for a family of 4. This does not include
all the additional surpluses that exist in the school districts, cities, or
counties in XYZ.
If these surpluses at the State-level were returned to the
people, the total economic benefits increase to $8,144 per capita and $32,574 for a family of 4.
Here is a chart
that tells the whole story, but only for the major portion of State-level
government, not the potential surpluses at the school districts, cities, or
counties in XYZ. Their potential surpluses would be added to the amounts
indicated below.
Economic
Impact Analysis Summary - XYZ CAFR Review - FY 2001
FIRST YEAR BENEFITS PER CAPITA
|
Economic
Principle |
|
Explanation |
|
Amount
(In
Thousands) |
Per Capita |
Family of 4 |
|
|
Actual Refund |
|
Total Potential Surpluses |
|
$ 42,395,994 |
$ 3,703 |
$ 14,811 |
|
|
|
|
|
|
|
|
|
|
|
Economic Output Multiplier (EOM) |
|
For every $1 of refund to the people the economic activity
increases by $2. This is the increase in Gross State Product (GSP). Results in
increased sales for local businesses. |
|
$ 84,791,988 |
|
|
|
|
|
|
Increase in GSP - Sales |
|
22.84% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Earnings Multiplier (EEM) |
|
For every $1 of refund to the people the wages paid to each
household wage earner increases by $.50. |
|
$ 21,197,997 |
$ 1,851 |
$ 7,405 |
|
|
|
|
|
|
|
|
|
|
|
Employment Ratio (ER) |
|
For each $100,000 in increased economic activity, one
additional job is created |
|
847,920 jobs created |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in State Revenues means a Reduction in
Taxes |
|
All governments earn revenue based on the economic activity in
their respective taxing jurisdiction. For every $1 of economic activity, the
State receives revenue of approximately $.10. This increase in revenue should
result in reduced taxes. |
|
$ 5,935,439 |
$ 518 |
$2,074 |
|
|
|
|
|
|
|
|
|
|
|
Increase in local government revenues |
|
For every $1 of economic activity, the local governments receive
revenue of approximately $.08. |
|
$ 6,783,359 |
$ 590 |
$ 2,360 |
|
|
|
|
|
|
|
|
|
|
|
Increase in Federal Revenues |
|
The Federal government earns $.20 on every $1 in economic
activity. |
|
$ 16,958,398 |
$ 1,481 |
$ 5,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL BENEFITS THE FIRST
YEAR |
|
|
$ 8,144
|
$ 32,574
|
|
|
[NOTE: In The CAFAR eBook, the above schedule (form)
is provided with the formulas shown for each cell in the table. The form is
provided as a spread sheet schedule and a word processing
form.]
If the
$612 billion was returned to the taxpayers this is what would happen:
|
(In Billions) |
Surpluses Effect |
Per Capita |
Family of 4 |
|
|
The surplus is
returned to the taxpayers. |
$
612 |
2,149 |
8,572 |
|
|
Wages are
increased. |
$
306 |
1,074 |
4,294 |
|
|
State
government revenues increase. |
$
122 |
429 |
1,716 |
|
|
Local government
revenues increase. |
$
98 |
343 |
1,372 |
|
|
Federal
government revenues increase. |
$
244 |
858 |
3,432 |
|
|
Total Benefits... |
|
4,849 |
19,396 |
|
In addition, 12.2
million jobs would be created. There would be a labor shortage in this country.
Business sales would increase astronomically.
It would create
the greatest economic expansion in the history of not only this country, but of
the world.
Results of Reviews
Here is the
results of State reports for FY 2003.
Name of
Government |
CAFR
Year |
Surpluses (In
Billions) |
Per Capita
Surplus |
Total 1st Yr
Benefits Per Capita |
Total Benefits -
Family of 4 |
Click for
Reports |
Alabama |
2003 |
$ 9.00 |
1,999 |
4,518 |
18,071 |
|
Alaska |
2003 |
$ 7.76 |
11,888 |
26,867 |
107,467 |
|
Arizona |
2003 |
$
10.07 |
1,840 |
4,165 |
16,660 |
|
California |
2003 |
$
59.83 |
1,695 |
3,830 |
15,321 |
|
Colorado |
2003 |
$
6.60 |
1,450 |
3,169 |
12,675 |
|
Florida |
2003 |
$
48.79 |
2,843 |
6,706 |
26,826 |
|
Georgia |
2002 |
$ 18.76 |
2,192 |
4,962 |
19,847 |
|
Hawaii |
2003 |
$ 4.40 |
3,492 |
7,892 |
31,567 |
|
Idaho |
2003 |
$ 2.18 |
1,608 |
3,634 |
14,535 |
|
Illinois |
2003 |
$ 17.47 |
1,386 |
3,458 |
13,833 |
|
Indiana |
2003 |
$ 11.73 |
1,904 |
4,303 |
17,210 |
|
Iowa |
2003 |
$ 4.84 |
1,647 |
3,722 |
14,889 |
|
Kentucky |
2003 |
$
5.63 |
1,351 |
3,060 |
12,240 |
|
Louisiana |
2003 |
$ 9.65 |
2,152 |
4,862 |
19,450 |
|
Maryland |
2003 |
$ 6.68 |
1,225 |
2,783 |
11,134 |
|
Massachusetts |
2003 |
$
10.06 |
1,565 |
3,536 |
14,143 |
|
Michigan |
2003 |
$ 10.13 |
1,009 |
2,282 |
9,129 |
|
Mississippi |
2003 |
$ 4.55 |
1,620 |
3,661 |
14,646 |
|
Minnesota |
2003 |
$ 10.53 |
2,078 |
4,700 |
18,798 |
|
Montana |
2003 |
$3.15 |
3,460 |
7,832 |
31,329 |
|
Nebraska |
2002 |
$2.88 |
1,679 |
3,700 |
14,799 |
|
Nevada |
2003 |
$ 3.56 |
1,530 |
3,457 |
13,830 |
|
New Jersey |
2003 |
$ 21.04 |
2,420 |
5,557 |
22,227 |
|
New York |
2003 |
$
52.56 |
2,723 |
6,153 |
24,612 |
|
North Carolina |
2003 |
$ 12.99 |
1,537 |
3,625 |
14,500 |
|
North Dakota |
2003 |
$ 2.88 |
4,544 |
10,269 |
41,078 |
|
Ohio |
2003 |
$
32.09 |
2,809 |
6,349 |
25,398 |
|
Oklahoma |
2003 |
$
7.78 |
2,226 |
5,036 |
20,146 |
|
Oregon |
2003 |
$
10.91 |
3,111 |
7,031 |
28,124 |
|
Pennsylvania |
2003 |
$ 21.07 |
1,715 |
4,010 |
16,041 |
|
South Carolina |
2003 |
$ 5.62 |
1,358 |
3,069 |
12,278 |
|
Tennessee |
2003 |
$ 4.23 |
719 |
1,625 |
6,499 |
|
Texas
|
2003 |
$
53.77 |
2,417 |
5,463 |
21,854 |
|
Utah |
2003 |
$ 4.80 |
2,018 |
4,565 |
18,260 |
|
Virginia |
2003 |
$ 10.85 |
1,492 |
3,372 |
13,487 |
|
Washington |
2003 |
$
17.65 |
2,921 |
6,504 |
26,015 |
|
West Virginia |
2003 |
$ 3.83 |
2,117 |
4,785 |
19,140 |
|
Wisconsin |
2003 |
$
7.44 |
1,368 |
3,091 |
12,363 |
|
Wyoming |
2003 |
$ 5.95 |
11,941 |
26,030 |
104,121 |
|
Cities and Counties: |
|
(In
Millions) |
|
|
|
|
Pima County, AZ |
2003 |
$ 238.7 |
723 |
1,634 |
6,536 |
|
Phoenix, AZ |
2003 |
$ 2,343.3 |
1,610 |
3,639 |
14,555 |
|
Maricopa County,
AZ |
2003 |
$ 844.55 |
3,521 |
8,021 |
32,083 |
|
Scottsdale, AZ |
2003 |
$ 483.19 |
2,207 |
5,012 |
20,046 |
|
Tempe, AZ |
2003 |
$ 341.75 |
2,144 |
4,869 |
19,474 |
|
Glendale, AZ |
2003 |
$ 385.37 |
1,668 |
3,687 |
14,748 |
|
Mesa, AZ |
2003 |
$ 245.36 |
565 |
1,311 |
5,244 |
|
Note: For those familiar with governmental
accounting, for surpluses we basically used GFOA Balance Sheet Account
Classification Codes 101, 102, 103, 151, 153, and 170 .
The above chart
indicates that the total surpluses for these States is $612 billion.
The above States
represent 93.5% of the U.S.A. population.
Now if this amount is extrapolated to the total U.S.A. population, the total
State-level potential surpluses are $612
billion. That is the amount of excess taxpayers money that the
States have sitting at the State-level government in excess of their needs to
operate the government. This does not include the school districts, cities
and/or counties in these States.
Economic Impact
Analysis if State-Level Potential Surpluses were returned to the
people:
There are two
segments to our economy, the private sector (individuals/businesses) and the
public sector (governments). Individual and business/company economics are
completely different from government economics. But most people apply their
individual or a business/company economics to governments. For example, it
sounds OK for a government to have an emergency fund, a rainy day fund, to hold
money for future expansion, paying off debt, etc. Isn't that OK?
NO!
As the above
table demonstrates that when the surpluses are returned to the people (private
sector of our economy) some magic takes place. It is elementary economics.
People fail to
realize that 12.2 million jobs would be created increasing the standard of
living for all. Unemployment would cease to exist. Wage and technology
productivity increases would be needed to make up for the shortage in the job
market.
Each report
contains an economic impact analysis to demonstrate the tremendous benefits to
the taxpayer when the surpluses are returned to the people.
There are 83,000
CAFRs prepared every year. Some are duplicates of data in other CAFRs. Just
think of the surpluses that exist with all the school districts, cities,
counties, States, and Other CAFRs. If these surpluses were returned to the
people, there would be no need to worry about Social Security again.
Summary - Unanswered
Questions
We have
proved that when money (surpluses) are provided to the people rather than
remain in the hands of governments, governments receive more revenues from the
increased economic activity. Let's look at something very closely.
Premise: One
government does not tax the income received by another government.
|