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Sunday, January 20, 2013

Understand The Reach Of The Tax Man

George Harrison, a genius with the strings and pretty good lyricist, understood the reach of the taxman.

Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman, yeah, I'm the taxman

Should five per cent appear too small
Be thankful I don't take it all
'Cause I'm the taxman, yeah I'm the taxman

If you drive a car, I'll tax the street
If you try to sit, I'll tax your seat.
If you get too cold I'll tax the heat,
If you take a walk, I'll tax your feet.

The tax man's reach influences both the legitimate and underground economy, but often in unexpected ways.  For example, raising taxes doesn't always equate to a proportional rise in revenues collected.

New York "RAISED" its excise tax by 58% from $2.75 a pack to $4.35 in 2010, but it resulted in only a 20% increase in revenue.

Also, raising taxes within a dynamic economy carries unexpected consequences. This is something politicians never seem to figure out.  The ‘unexpected’ explains why balancing a budget during a (sovereign) debt crisis, a phenomenon that raises and cuts taxes and spending, respectively, curtails economic activity; this is explained by Jim's formula.

Hubert Hoover tried to 'balance America's budgets' in effort to right the ship in the early days of the Great Depression.  This policy only accelerated the economic contraction and was the main reason why he lost the election of 1932.

Taxation of the economy s operate within a negative feedback.

Headline: Smuggling Facts Into the Tax Wars

Last week a startling number ricocheted around the web, from CNN to the New York Times Economix blog: More than 60 percent of cigarettes smoked in New York State, which has the highest tobacco taxes in the nation, are “smuggled” in from out of state and consumed tax free. The smuggling number originates with an an anti-tax-leaning think tank in Michigan, the Mackinac Center. If that number is right, it would give pause to advocates of cigarette taxes.

Figuring out just how much cigarette taxes lead to tax evasion, though, is harder than the initial reports make it sound. It’s clear that higher taxes — New York raised its excise tax from $2.75 a pack to $4.35 in 2010 — cut cigarette sales. The difficulty with this, as with other sin taxes, is in understanding how much of the decline in sales comes from tax evasion and how much from changes in behavior.

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