Why Taxes Don't Matter

I've talked about this before.. It's not that hard an argument, but it seems like almost nobody gets it.  So I'll try once more.

Businesses survive or die based on costs and revenue--usually sales.  If costs exceed sales, they die.  If sales exceed costs, they can grow, or they can bank the excess against weaker times.  So anything a business can do that reduces costs without reducing revenue is good for them.

Most businesses are in competition with each other.  Apart from the direct competition against others selling similar products, even if they don't have competing products, they are competing for resources and for their customer's limited money.   Simplistically put, this is a zero sum game: in order for one business to gain, another has to lose.  It's not really zero sum, because the economy, population and exploitation of resources is constantly growing a little, but it's close enough that for simplicity we can pretend that it is.

For businesses in competition with each other, if one can lower costs while others cannot, it can lower prices and gain an advantage.  If one town lowers taxes, businesses in that town will have an advantage, and businesses with the flexibility to move have an incentive to move there.  The same thing happens at the state level, although it's generally harder to get employees and existing customers to move.  It's really hard to get them to move from country to country, although with globalization, less and less every day.

These barriers to movement are very important economically.  Within the barrier, people and money are free to move around, but across it, they are not.  Macroeconomics is the study of complete economies, within these barriers.  It turns out that there are some significant differences between these and businesses competing against one another.  One of the most important is taxation.  If everybody's taxes are changed equally, nobody gains an advantage.  To the extent that the barriers exist and the taxation is equal, this means that taxes don't matter to the economy.  They are simply pulled from the economy and the value of each remaining dollar is deflated to match.  It's not really as simple as that, because the government is part of the economy and every bit of government spending goes right back in.

Because the government is large, how the government chooses to spend can significantly impact the economy.  As conservatives like to put it, picking winners and losers.    But government has some significant advantages over private enterprise.  For example, it can do big things.  Private business would never have built the transcontinental railroads, the interstate highway system, the hydroelectric system, and more.  It can borrow money at rates impossibly lower than any business.  It can regulate businesses, to make sure that they're not committing fraud, trade restraint, or any of a host of other unfair practices.  It can create public safety institutions, from the police and fire departments to the military, and FEMA.   It can do big research projects, from NASA to NIH, far beyond the reach of any private business.

Nearly all of these things are immensely stimulative of the overall economy.  For example, building the roads employed millions of people, nearly all of whom worked for private companies at the time, and once they were built, they enabled hundreds of millions to move goods and people across great distances.

The free enterprise system is a good thing.  But like all things, it's just as possible for there to be too much as too little.