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How embedded taxation produces artificial scarcity


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#1 kmarinas86

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Posted 13 September 2007 - 07:31 PM

Operative terms:
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.


#2 Buffy

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Posted 14 September 2007 - 10:13 AM

Not sure why you want to come up with new terminology when there are perfectly good terms for the concepts you are talking about in economics. The only advantage is to promote the pejorative term "artificial scarcity" which you define here without providing any justification: there is no "increased investment" just "lower tax collection". Business does not have to invest money not spent on taxes and the trend is actually to simply use it to perform mergers (not an investment, just shuffling around ownership), or to increase profits which go into folks pockets as income.

You should look up the terms "progressive tax" and "regressive tax": the primary result of a shift solely to sales taxes is that because the tax rate is flat and the rich consume a much smaller percentage of their income, the poor pay a larger tax rate, which is not very popular because there are more poor people than rich people.

Invention of terms is useful in obfuscating the weaknesses of proposals like this one, but the weaknesses are still there. Inventing new terms when none are needed is usually a sign that the proposal is not a good one...

When I use a word, :(
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#3 kmarinas86

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Posted 17 September 2007 - 01:31 PM

Not sure why you want to come up with new terminology when there are perfectly good terms for the concepts you are talking about in economics.


"Business prices" and "consumer prices" aren't new terminology. "Embedded taxes" and "unembedded taxes" are relatively new, but I'm not the one who made them up. "Nominal investment" and "real investment" are not new terms.

The only advantage is to promote the pejorative term "artificial scarcity" which you define here without providing any justification: there is no "increased investment" just "lower tax collection".


What do you mean increased investment? In nominal terms, or in real terms? It is an important distinction. Why would you say that there is "lower tax revenue". Tax revenues are increasing more often than not. Also, the long-term trend is that more dollars are being invested into the economy. I'm not sure why you say that investment doesn't increase.

Business does not have to invest money not spent on taxes and the trend is actually to simply use it to perform mergers (not an investment, just shuffling around ownership), or to increase profits which go into folks pockets as income.


Possible, but certainly not the rule.

You should look up the terms "progressive tax" and "regressive tax": the primary result of a shift solely to sales taxes is that because the tax rate is flat and the rich consume a much smaller percentage of their income, the poor pay a larger tax rate, which is not very popular because there are more poor people than rich people.


True. One of the major faliures of a sales tax is how to make poor people better off. This means something else other than a sales tax. For example, a progressive income tax with no sales tax, or a tax credit based on poverty level spending in combination with a sales tax.

Invention of terms is useful in obfuscating the weaknesses of proposals like this one, but the weaknesses are still there. Inventing new terms when none are needed is usually a sign that the proposal is not a good one...


I did not create any original terms. They have been used by others.

#4 Buffy

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Posted 17 September 2007 - 03:09 PM

"Business prices" and "consumer prices" aren't new terminology. "Embedded taxes" and "unembedded taxes" are relatively new, but I'm not the one who made them up. "Nominal investment" and "real investment" are not new terms....I did not create any original terms. They have been used by others.

Indeed, but the one I was objecting to was "Artificial Scarcity," which has a very specific definition having to do with oligopolistic or monopolistic power over supplies of products that have no limits on production:

Artificial scarcity describes the scarcity of items even though the technology and production capacity exists to create an abundance. The term is aptly applied to non-rival resources, i.e. those that do not diminish due to one person's use, although there are other resources which could be categorized as artificially scarce. The most common causes are monopoly pricing structures, such as those enabled by intellectual property rights or by high fixed costs in a particular marketplace.

In your original post however you try to define it as:

The artifical scarcity produced in a given period is equal to the periodic value of all embedded taxes. In the Federal US government, this embedded taxation, or artificial scarcity, easily exceeds $2 trillion.

Thus you are *definitionally* equating Artificial Scarcity with Embedded Taxes, and providing no justification for doing so.

As you note, "embedded taxes" are a relatively new term, and the etymology should be enlightening: it is mostly used within arguments for a "Fair Tax" which is a proposal to eliminate income taxes, which you appear to be arguing for in this thread. In this context critics consider "Embedded Taxes" to be a euphemism designed to make them seem sneaky and unfair.

I apologize for giving you credit for making up these terms, but in the case of Artificial Scarcity, you have definitely made up the definition.

The only advantage is to promote the pejorative term "artificial scarcity" which you define here without providing any justification: there is no "increased investment" just "lower tax collection".

What do you mean increased investment? In nominal terms, or in real terms? It is an important distinction. Why would you say that there is "lower tax revenue". Tax revenues are increasing more often than not. Also, the long-term trend is that more dollars are being invested into the economy. I'm not sure why you say that investment doesn't increase.

In both real and nominal terms: on this point, real versus nominal irrelevant! No assumptions about inflation are being made here at all, and it would hold true even in a deflationary environment due to the fact deflation never persists over the long term, and investment is generally based on long-term rates (both real and nominal). I explained this by saying that there is in fact no pressure or assurance that decreased taxes will increase investment, as well as the fact that many things called "investment" are often non-productive transfers of ownership that are not subject to the multiplier effect.

You do seem to recognize this point and say:

Business does not have to invest money not spent on taxes and the trend is actually to simply use it to perform mergers (not an investment, just shuffling around ownership), or to increase profits which go into folks pockets as income.

Possible, but certainly not the rule.

Which is hardly a refutation of the point. I'm not saying its the rule, I'm saying there are loads of exceptions, and trying to say that they are equal, which you do here:

... 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.

... is clearly false, as shown by Larry Ellison's America's Cup entry.

Now what I'm really confused about is that while you are presenting arguments that are exactly in line with the--in my opinion, misleading--arguments promoting the "Fair Tax," you seem to agree with me and others that income taxes are not all that bad:

True. One of the major faliures of a sales tax is how to make poor people better off. This means something else other than a sales tax. For example, a progressive income tax with no sales tax, or a tax credit based on poverty level spending in combination with a sales tax.


I'll note here though that a tax credit for the poor--which is a key element of the Fair Tax, designed to ameliorate its inherent inequities--does *not* do what its claimed to do: *everyone* ends up getting the first X dollars of their consumption untaxed as part of a rebate, because without indexation--which can't be dealt with *without* an income tax :P --you get a huge kink in the tax rate curve (that is, its not flat, and people--specifically the middle class whose support you need to pass it--start screaming bloody murder). When you do give everyone the credit, then the rich pay a lower percentage of their income in taxes, because they get a "tax credit" for 100% of the money they invest; an option that is not available to the poor in any practical sense.

There are those that argue from a Social Darwinist viewpoint that the poor deserve no "fairness," but from a labor and social tranquility point of view, such a policy almost always results in very negative consequences. Its not "bleeding heart liberalism" that drives "fairness" to the poor, its avoiding the French Revolution....

I apologize for reacting so strongly to this, but in my view you've done little here but uncritically promote the Flat Tax, and thrown in an odd definition that exacerbates the confusion in an attempt to--whether you agree or not--cast aspersions on the notion of an income tax by using the term Artificial Scarcity: a term that is often described as "the reason why Bill Gates is so filthy rich."

Only the little people pay taxes, :hihi:
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#5 kmarinas86

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Posted 17 September 2007 - 03:22 PM

From politicalforum.com

The problem with corporate welfare is this.

The theory behind corporate welfare is that if you let corporations have tax breaks, they in turn can use that money to increase their business and then in turn create more jobs for the American people.

Now I believe this is a fair economic theory and does work and have merit, However.

When you give corporations huge tax breaks this shifts the tax burden to the American worker, Now the corporations are producing jobs, but the American people have no money. And if the common American has less take home pay due to taxes. they in turn spend less, Which creates a major flaw in the ideal.

For if the American citizen spends less at the store, then the corporations don't sell as much goods, which in turn creates less profits for the corporations and in turn creates employee layoffs

It would seem the thing to do would be that in time of extreme unemployment to create some corporate tax breaks. and spur a business expansion creating more jobs And in times of low consumer confidence and low unemployment to shift the corporate tax breaks back down to the American consumer so all those people with jobs have enough money to spend on the goods the corporations produce

That said I believe in our current economy it is time to shift that tax break to the American consumer and temporarily shift a little bit of the tax burden up toward the major corporations, (Such as Exxon mobile, and other high profiting current corporations) who can now afford it.

This would without doubt put more money in the American publics pocket so they could purchase more items from these corporations (Such as buying gasoline for that nice confident drive through the country)

In other words to every thing their is a season, and I believe it is economically time to temporarily shift the tax burden upward towards the American corporations a little for a moment, so the American public can have some money to spend and to propel the economy.

Now if you want to give both a tax break then you must first curtail government spending


Consider the following situations:
ExxonMobil has a corporate tax of $27.9 billion and 106,400 employees. This is the same as $262,218 per employee.(source)
Microsoft has a corporate tax of $6.036 billion and 79,000 employees. This is the same as $76,405 per employee.(source)
Best Buy has a corporate tax of $0.752 billion and 140,000 employees. This is the same as $5,371 per employee.(source)
Kroger has a corporate tax of $0.633 billion and 310,000 employees. This is the same as $2,042 per employee.(source)

In other words, the corporate tax is very progressive! The corporate tax is like a sales tax in the sense that it is a tax on goods and services (whether they are related to cash dividends or product dividends). The big difference is that the sales tax is very regressive with income, while the corporate tax is very progressive with income.

All that would be needed to fund the federal government would be two things:
A 10% federal retail sales tax.
A 50% corporate tax.


Gone would be:
All taxes on personal income, social security, medicare, property, capital gains, interest, etc.

Many taxes (the ones listed just above) would be eliminated.
This leads to very high profit margins before the federal retail sales tax and the corporate tax kick in. The 10% replacement federal retail sales tax would mean that final cost of goods sold would reduced by 10%, assuming that the amount that consumers pay is not signficantly altered. Before the corporate tax or competition kicked in, profits would double from 12% of sales to 24% of sales. But once the 50% corporate tax is added, net profits return to 12% of sales, and the corporate tax provides additional revenue equal to 12% of sales. This in combination with the 10% federal retail sales tax would be sufficient to fund the government. The combination of the extremely income progressive corporate tax and the income regressive sales tax would lead to a net increase in progressivity. This is because progressive corporate tax revenues would constitute the majority of government revenues, and they are more income progressive than our income tax system. While a 10% retail sales tax is regressive, the pressure it would have on final supply prices would increase profits per dollar invested, and therefore taxes per dollar invested. So, in a counter intuitive sense, it promotes growth in the revenue from corporate taxes, simply because each invested dollar represents 11% (i.e. 1/9th) more capital than without the downward pressure that a replacement sales tax has on cost of goods sold.

#6 kmarinas86

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Posted 26 September 2007 - 01:24 PM

In your original post however you try to define it as:
Thus you are *definitionally* equating Artificial Scarcity with Embedded Taxes, and providing no justification for doing so.


I was "equating" artificial scarcity with particular consequences of embedded taxation.

Let me take this one step further.

23% of America's GDP is about $3 trillion. The FairTax, which claims to be revenue neutral, actually collects enough revenue in order to reduce considerably the budget deficit, or alternatively, maintain present levels (%) of funding while also covering the prebate.

Fair or not fair, the following things are clear:

  • By moving federal tax bases so that they are somewhat detached of costs of goods sold, just like how retail markup and local and state sales taxes are detached from them, business prices can be reduced. One could expect either increases in the savings interest rate (if businesses take advantage of the lower business prices to provide same profits for less financial cost) or, more likely, a decrease in the borrowing interest rate (if banks take advantage of the lower businesses prices to provide the loans with smaller interest rates).
  • As a generality, some industries would gain over others. Particularly, the services industry would have their tax burden reduced. This includes medical and financial industries which have a reputation for being too expensive. Their prices could be dropped by a few percent. The major industry that would have their tax burden increased is the retail industry, which has a reputation for being cheap and even for having prices which are too low (e.g. Walmart: "Low wages. Low morals. Always."). Their prices could be increased by a few percent.
  • As a retail worker in Kroger, I know that I would do better off with the FairTax. Last year, I was 25 cents above the federal minimum wage ($5.50/hr), and I got a tax refund that was less than the union dues I paid for that year (the union dues are a dollar a day each week that I work, regardless of the hours in that week). With the FairTax, I would get over twice the amount in refunds as my union dues, about $800 incremental because I still live at my parents house. When I move out, my annual share of FairTax refunds would be increased to $2,348, regardless of how much I earn. (source) If extrapolated to the employee count and financial statement of the company I work for, the prebates would be about 4.5% of Kroger's gross profit. Federal minimum wage laws would force my annual income to rise, as long as I work the same amount of time. The benefit to the annual income would be raised by up to about $2000, or $400, depending on who I live with. This saves me 400 hours, or 80 hours, of work a year which can be anywhere from 8 hours to 1.6 hours a week.


#7 kmarinas86

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Posted 26 September 2007 - 03:31 PM

I'll note here though that a tax credit for the poor--which is a key element of the Fair Tax, designed to ameliorate its inherent inequities--does *not* do what its claimed to do: *everyone* ends up getting the first X dollars of their consumption untaxed as part of a rebate, because without indexation--which can't be dealt with *without* an income tax :hal_skeleton: --you get a huge kink in the tax rate curve (that is, its not flat, and people--specifically the middle class whose support you need to pass it--start screaming bloody murder). When you do give everyone the credit, then the rich pay a lower percentage of their income in taxes, because they get a "tax credit" for 100% of the money they invest; an option that is not available to the poor in any practical sense.


I believe that earning income does not mean that you are a binge spender. I see nothing wrong with people who are rich in terms of income, but middle class or poor in terms of personal consumption. In fact, when people (even stock brokers) live like middle class people, they are saving others quite a bit of time. All the wood, nails, and stained glass that would have been spent building the mansion would have instead gone to the furniture inside other people's homes.

In my previous post, I have provided proof that the working poor, such as myself (a 21 year old momma's boy working as supermarket janitor/clerk) would not lose under the FairTax. Under the FairTax, middle class participation will rise, however, it would reduce the average per capita income of the middle class, since rich people would have more income. If people, such as myself—I have $2600 invested—removed their capital investments too quickly and gave it away, it would be a philanthropy of a lower magnitude than the FairTax prebate. Imagine the billionaires of this country donating $400 billion a year! That kind of philanthropy is what the FairTax prebate would achieve, and much of it would come from those who consume 50% of America's goods. A person spending $1 million a year would pay $30,000 in prebates, enough to support ten parents. Once the size of the middle class rebounds from those entering from the working poor, education will improve, as fewer people would sacrifice in the retail industry to attain a decent education. There would be no federal income tax on teachers or nor any federal tax on their classroom supplies, so teachers would have less non-education things to worry about. Also, because of the positive impact it would have in education, it would lead to a rise of dissent against agressive spending of some rich people. At some point, a rent would be established on the business in proportion to the value of its intellectual property rights, which the executives would have to pay out of their pockets (i.e. by reducing their net worth).

If American people such as myself suddenly pulled back all their foriegn direct investment, this would increase investment in America, but it would devastate the economies of poorer countries. If a foreign country was being invested in and was about to come to financial collapse, it can be due to high financial leverage in capital markets and over valuation of stocks. In the same context, there has been the claim of "colonization" of foreign countries. To prevent increasing the debts of other nations whose financial status is vastly different than ours, I would put a FairTax on new foreign direct investment to encourage investment in our country. To be more precise, this would be a tax on new contributions to foreign direct investment, not on FDI capital gains or losses. The FairTax on final goods and services and new foreign direct investment contribution would improve the American economy while at the same time reducing the share of wealth held by the rich and its power over businesses in developing economies.

#8 Buffy

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Posted 01 October 2007 - 01:45 AM

All you've really said in the previous three posts is that under the Fair tax, because you're in a low-wage job, you'd get the so called prebate, so you'd have more money, but you've completely ignored the fact that with a 50% corporate tax and an additional 10% sales tax, everything you buy would cost more.

Probably more than the reduction in taxes and your prebate put together.

I suggest you look at some of these consequences before you convince yourself that it would be "better" for you....

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