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October 10, 2024 

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FOREIGN DIRECT INVESTMENT: The acquisition of controlling interest in foreign firms and businesses from one country in another country. Abbreviated FDI, foreign direct investment can also take the form of constructing factories, structures and equipment (or any form of physical capital) in foreign soil. FDI does not include foreign investment into the stock markets (portfolio investment). Most economists consider foreign direct investment more useful than portfolio investment since this last one is generally regarded as temporal and can leave the foreign country at the first sign of trouble. FDI on the other hand, is considered more durable and with larger economic (potential) benefits.

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Paying TAXES

The time has come to take a firm stand! The Shady Valley Gazette Tribune-Journal has published an inflammatory editorial calling for a "pedestrian" tax on anyone who ambles around the economy. This tax, as every pedestrian would surely agree, is misguided and short-sighted. It's also unfair and probably unconstitutional. How DARE the editors of the Shady Valley Gazette Tribune-Journal call for a "pedestrian" tax. Sure they argue that ambling pedestrians should help pay for the sidewalks, traffic signals, and other assorted public goods. But, it's certainly not in MY best interest as a pedestrian to pay this misguided, short-sighted, unfair, and probably unconstitutional tax.

>A Taxing Life

Whether we like it or not, taxes are an inherent, avoidable, absolutely necessary feature of our economy. As we saw with Fact 5, Our Necessary Evil, government provides us with highly-valued stuff that can't be produced without tax dollars. As such, we voluntarily let governments (federal, state, and local) force us to pay taxes. And governments are very good at this task.

That's why we have a bunch of different taxes -- some of which might not be even recognized as taxes. Here's a list:

  • Income. The most popular on any top 40 list of taxes is, of course, the income tax. This is the primary source of revenue for the federal government (which we can affectionately call the Feds), collected by our good friends with the Internal Revenue Service. Many states also take a slice of income taxes from our personal economic pies, and a few city governments have sharpened their knives as well.

  • Sales. Probably the second most popular -- sales tax -- is that levied on retail sales, a major source of revenue for state and local governments. The Feds impose a few of their own selected sales taxes, usually termed excise taxes, on such things as cigarettes, alcohol, gasoline, and automobile tires.

  • Wages. In addition to the ever popular income tax, the Feds have a tax on workers' wages for the social security system -- the FICA deduction on your paycheck.

  • Property. Local governments -- cities, counties, and the like -- are prone to collect a lot of revenue with property taxes. These are taxes on property within a government's political jurisdiction.

  • Corporate profits. An always controversial tax is that levied on the profits of our mighty (and not so mighty) corporations of the second estate. This is a significant source of revenue for the Feds, but a few state and local governments also do a bit of corporate profits taxing.

  • Inheritance. The Feds collect a tax on a portion of the wealth that is passed on from one generation to the next -- an inheritance tax.

  • Fees and user charges. All levels of government have fees and charges for stuff. While these are often thought of as prices, they're also taxes. They include, but by no means are limited to, drivers license fees, turnpike fees, parking and speeding tickets, public golf course greens fees, public part entrance fees, college tuition, and grazing fees on public rangeland. While a government service or good typically comes with the fee, unlike other prices, the fee seldom is related to production cost.

If you think it's tough to do anything in our economy without running across some sort of government tax, you're right. Then again, it's also difficult to go anywhere or do anything without benefitting from government produced goods.

We All Pay, Some Just More Than Others

When pointy-headed economists compare different taxes, like those listed here, they do so as a percentage of income. Even though property taxes, user chargers, sales taxes, and many others are based on assorted activities, each ultimately eats away part of your income. The big question in this sort of comparison is whether taxes as a share of income increase, decrease, or stay the same for rich versus poor.

Here are the three possibilities:

  • Proportional. Everyone, regardless of income, pays the percentage in taxes. For example, we have a proportional tax if you pay $1,000 on $10,000 of income and your neighbor pays $2,000 on a $20,000 income. Both of you pay 10 percent.

  • Progressive. A tax in which people with more income pay a larger percentage. A progressive tax occurs if you pay $1,000 on a $10,000 income, while your neighbor pays $4,000 on a higher $20,000. While you pay 10 percent, your neighbor pays 20 percent.

  • Regressive. Those with more income pay a lower percentage. With a regressive tax you and your neighbor both pay a $2,000 income tax, even though your $10,000 income is less than your neighbor's $20,000 amount. Your 20 percent tax rate is higher than your neighbor's 10 percent.

As you might suspect, there's a constant, long-running battle between the second and third estate over progressive and regressive taxes. The relatively wealthier members of the second estate prefer regressive taxes, while the third estate thinks progressive taxes are more justified. As is often the case, the government leaders of the first estate waffle in their support of both sides. That's one reason why we seem to have such a variety of taxes. When the first estate follows the wishes of the wary consumers, unappreciated workers, and disgruntled taxpayers, then we tend to see more progressive taxes, such as those on inheritance, profit, property, and income (if designed properly). However, when the second estate gets the government in its clutches, we see more regressive taxes, like sales, social security, and a revamped income tax system.

If you take a level-headed, balanced approach to taxes, you might think that proportional is the best alternative. Hey, make everyone pay the same percentage and be done with it! There are, however, some good reasons to go with either regressive or a progressive taxes.

  • A progressive tax would seem to be more "fair" in that wealthier people don't spend as much of their income on basic necessities (food, shelter, clothing, and energy), but use a larger share of income for luxury stuff (jewelry, vacations, country club memberships). They can share a larger burden of the expense for government provided necessities (police and fire protection, education, transportation, and national defense) with relatively less suffering.

  • A regressive tax, however, would leave more income in the hands of the wealthy that could be used for investment in capital. Because poorer people spend most of their income on basic necessities, that don't have much left over for investment. The wealthier you are, the more you invest. Our economy gets all sorts of benefits from capital investment that makes life better for both the second and third estates.
The Best Taxes Money Can Buy

Few people (if any) like to pay taxes. But, taxes have to be collected to do what the government does. The trick, then is to collect taxes in a manner that is as painless as possible. By painless here, we're not concerned with physical pain as much as a disruption of the economy. In other words, efficiency. We want the economy to be as efficient in the allocation of scarce resources as possible after the government collects taxes. In fact, taxes can actually make our economy more efficient as well as less efficient.

Let's do the less efficient first. Suppose our government imposes a sales tax on some sort of good like "dirt" that, as we saw in Fact 4, is exchanged via a very competitive market. The price buyers are willing to pay is equal to the cost of producing this commodity, and the market exchange is efficient. If you put a sales tax on dirt, then the price buyers pay (with the tax) will be greater than the cost of production (after taxes are deducted) and the market becomes inefficient.

This tax, though, isn't a big problem if buyers and sellers continue to buy and sell the same quantity after the tax as before. Inefficiency arises if the buyers' price goes up so much that buyers decide to buy something else or if the sellers' price goes down so much that sellers decide to produce something else.

Governments, bless their tax-collecting hearts, do recognize this fact. That's why you see a lot of taxes on stuff that we keep on buying and selling in spite of the taxes. Examples include sales taxes on cigarettes, alcohol, gasoline, food; income taxes on income; social security taxes on wages; and taxes on inheritances. As a society we're pretty addicted to smoking, drinking, driving, working, and dying, and we're not likely to change too much because of some little government tax.

Now for a look at the more efficient side of taxes. Some markets do NOT do an efficient job of producing and trading stuff. The best examples of markets that need a little help to get the price equal to production costs are those that have some pollution. While you can find out more about this in the discussion of pollution, suffice it here to say that pollution is a cost that goes beyond the normal workings of a market. In other words, it's a production cost that's not part of the buyers' price. A tax on a market with pollution can improve efficiency.

Make 'em Pay, Make 'em Pay

As a licensed, certified member of the third estate, you probably prefer taxes on businesses. Hey, they have the money, let them pay. There is, however, a problem in this. As producers and suppliers, businesses pass along the taxes they pay to consumers -- if they can.

As a general rule -- on with a bunch of exceptions -- buyers and sellers both tend to share in the ultimate payment of a tax. For example, let's say that Frosted Honey-Coated Super Sugar Junks cereal sells for $2 a box without a tax. That means it costs the suppliers $2 a box to produce and buyers are willing to pay the same $2 amount to consume this most satisfying product. All is happy in cereal-land.

This changes, though, if a 10 cent tax is attached to each box sold. Buyers now get their morning sugar fix by paying $2.10 per box. If buyers are reluctant to pay this higher price, and switch to something else, like a wholesome pound of bacon, then less cereal is sold. As consumers buy less and producers sell less, production costs are likely to fall because producers can get rid of some high-priced, and unneeded, resources. If their costs go down to $1.95 per box, then the buyers' price, with the tax, is only $2.05. As such, buyers pay 5 cents of the 10 cent tax and sellers pay the other 5 cents.

The tax, however, is seldom divided equally among buyers and sellers. Which side pays more depends on market control. If buyers have the control, then they can effectively say, "We won't pay the tax," and sellers will be forced to pay most or all of it. The alternative, of course, is that sellers use their market control to force buyers to pay the bulk of the tax.

Recalling the second estate tends to have the most market control, either as sellers in the product markets, or buyers in the resource markets, you can probably guess who ends up paying most of the taxes -- the wary consumers, unappreciated workers, and disgruntled taxpayers of third estate.

Here are a few tax tips:


A Few Tax Tips

  • In that taxes hit some people harder than others, consider the source when anyone advocates more or fewer taxes. Keep an eye on the progressivity or regressivity of all taxes. Who stands to benefit and who's likely to be hurt by any tax changes?

  • Some taxes can be good for our economy if they correct some sort of inefficiency like pollution. Keep in mind that whoever is responsible for the inefficiency is likely to cry murder if forced to pay the tax.

  • Some politicians and second estate leaders, try to make it seem as though businesses pay taxes that are really passed along to consumers. Businesses with significant market control, tend to pay a small share of a tax.

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Today, you are likely to spend a great deal of time looking for a downtown retail store looking to buy either a genuine fake plastic Tiffany lamp or a microwave over that won't burn your popcorn. Be on the lookout for letters from the Internal Revenue Service.
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Helping spur the U.S. industrial revolution, Thomas Edison patented nearly 1300 inventions, 300 of which came out of his Menlo Park "invention factory" during a four-year period.
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