ECONOMIC IMPACT ANALYSIS
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.
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:
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 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.
These are economic principles which can be found in almost any elementary economics textbook.
"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.
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.
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).
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.
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%.
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.
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.
Here is a summary of what the above economic impact indicators mean.
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.
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
[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 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.
Here is the results of State reports for FY 2003.
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.
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.
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.