The Whole Pie (5 of 6)

OK: Monday will be the final installment on this topic, but before we get to the final installment we have one more piece of this data that has to be unraveled   Some people reading this series (and I admit there are a lot fewer of you than there were 4 years ago before this blog when into hibernation) are probably concerned that I keep wanting to revert to the "total wages" number when calculating the size of the problem rather than using the whole GDP.  Doing that, you may be thinking, magnifies the problem and seems to put it out of reach of a solution.

The problem, of course, is that in the United States, we tax individuals (human beings) based on their income (which: in a P&L, is the "top line" of revenue), and we tax Corporations on their net profits (on the P&L: the "bottom line") -- both adjusted for deductions, of course.  So while there may be a top-line (as measured by the GDP) of stuff over and above wages to the tune of more-or-less $11 trillion, a LOT of those dollars are swallowed up by cost of goods and are not taxable using the current model of taxation.  And, in my view, they shouldn't be -- they are not really income dollars: they are cost-of-goods dollars, and in some sense they are double-dipped against wages.

Here's how to think of that: Abe's Accessories makes screws.  In fact, last year, Abe's sold $1 million in screws to Bob's Barricades, and Bob sold $10 million in barricades to Carl's Contractors, who used the barricades for $100 million in highway work they did for the state of Delaware (hypothetical).  All $111 million of that shows up in the GDP, but Abe only made $90K in profit; Bob only made $190K in profit, and Carl made $500K in profit which he had to split with his brother who is also an invested private owner.  All the metal in the screws, the blocking material in the barricades, and the stuff Bob used to pave the highways (from machines to paving material) was not taxed: only the net profit (final income) was taxed.

In other countries, there's a way around this: they charge a VAT tax when you buy something wholesale.  So when Abe buys raw materials to make into screws, he pays the foundry for the difference in price between the raw ore and the raw metal he receives -- and a tax to the government for the difference in value.  When Bob buys screws from Abe, he pays Abe the screw price, and then the government a tax on the difference in value between raw metal and screws.  Etc.  In that case, almost all of the value in the GDP is therefore taxed -- but it also results in much higher prices for the end user.

The alternative to this, of course, is a universal sales tax -- which is sort of a simplified VAT tax anyway (unless you're an economist).  But in the current system, that is itself double-dipping against income which was already taxed when it was paid out (in most cases).

That's why, at the end of the day, the comparison of private income vs. public expenses looks like this:

That's right: all the hoopla about excessive corporate profits, and it turns out that corporate profits in the US are about 25% of all income in the US.  AND: the total of all wages plus corporate profits is actually less than all public expenses (federal, state and local).

You now have everything you need to know about whether or not the US has a tax rate problem or a government expense problem, and we will discuss what to do about it on Monday right before you cast your vote.

Have a nice weekend; be in the Lord's house on the Lord's day with the Lord's people this weekend as you pray about this and all the other things which are worrying you about this present age.