Business prices - The price of supplies sold to businesses
Consumer prices - The price of supplies sold to consumers
Embedded tax - The cost of taxes included in business prices (e.g. income tax)
Unembedded tax - The cost of taxes included in consumer prices and excluded from business prices (e.g. sales tax)
Nominal investment - The dollars offered to increase supply (e.g. investment funds)
Real investment - The supply that is bought with the nominal investment (e.g. labor, land, and capital)
Now for our calculations:
Nominal investment allows for real investment. The higher the business price of a real investment, the more nominal investment necessary to cover it. Business prices that include the cost of embedded taxation are passed onto other businesses in the form of higher business prices. In effect, when nominal investment is used to cover the business prices that includes tax, the real investment that can be bought with the nominal investment is reduced. If all embedded taxes were replaced by an equal amount of unembedded taxes, a source of artifical scarcity is removed. This is by reducing the business prices relative to the consumer prices. When this occurs, the amount of real investment that can be bought with one dollar of nominal investment increases by the same factor that the supply prices are reduced.
The artifical scarcity produced in a given period is equal to the periodic value of all embedded taxes. In the Federal US government, this embbeded taxation, or artificial scarcity, easily exceeds $2 trillion. Therefore, replacing embedded taxes with unembedded taxes is the equivalent of having an additional $2 trillion of nominal investment in a year. Another way of looking at it is having $2 trillion less money being borrowed in a given year.
Either way, if embedded taxes were replaced by unembedded taxes, interest rates would fall by a signficant margin, and borrowing would become less necessary. The cost of banks would also be reduced due to the drop in the business prices.
If a government who recieves the unembedded taxes was able to take advantage of the business prices and managed to sell them at the consumer prices, its profit would be similar to the unembedded taxes for those goods or services. Therefore, a government should not have to pay for unembedded taxes it recieves, as this would create another artificial scarcity in which the government holds more money (i.e. a higher fraction of the economy's currency) to perform the same operations, by literally taxing itself. By not taxing itself, it would be able to reduce its budget by the percent of government consumption that it currently owes to itself in the form of embedded taxes which currently go to itself. For the US federal level of government this is about 23% of its budget. This is nearly equivalent to the federal deficit projected for FY 2007.
Overall the solutions proposed to reduce artifical scarcity include:
- Replace embedded taxation with unembedded taxation.
- Barring any government entity from taxing itself.