John: I always wonder why taxes have to be raised anyway? The amount we pay in taxes should be sufficient to
cover our needs. If the population increases, then the tax base should increase, hence, more taxes collected.
OK, give a little increase for inflation, but that is about it.
The question to ask is why should we have inflation?
For far too long The Fed has operated on the assumption that a small amount of inflation is a good thing. It has even been automatically built into policies at both the Government level as well as in business. The latter mainly through cost of living (COLA) clauses in Union Contracts.
Milton Freedman demonstrated that, from the monetary side, as long as the money supply is kept in step with increases or decreases in economic activity there would be no inflation from that cause. Inflation could still arise from the shortage on the supply side or other causes. But those can correct themselves over time. Inflation caused by an overabundance of money becomes structural, even if a correction follows because of the distortions caused by COLA adjustments. COLAS never adjust downward.
Taxes themselves can be a source of inflation. Taxes are a cost not only to business but to individuals. As tax rates rise, business will raise their price to cover the increase and workers will demand higher wages and salary to make up for the taxes. Of course, once a stated level of revenue for a business or income for an individual is achieved there is a great reluctance to see it decrease if taxes should be lower.
The case gets even more complicated. Businesses don't pay taxes they collect them. By that I mean any tax is a cost of doing business so a business must include those costs in the price of their product whatever it may be. Otherwise it is not covering its costs and will eventually fail.
Now a single proprietorship, partnership and some forms of Corporations only have their earnings taxed once. For those individuals there will also be a tax on their accumulated wealth, which was already taxed as earned, at their death.
For regular corporations, their net income is taxed as earned. That same income is taxed again when it is paid out to itys owners in the form of dividends. and then taxed a third time at death. Roughly at today's rates,that is a total tax on those earnings of up to 70.375%.
Now for regular corporations which are successful, any earnings it retains to expand its business, all other things being equal, will eventually be reflected in its stock price. To the extent that is true, that portion of the capital gain in the value of the stock has already been taxed. Any monetary inflation that takes place over time will also be reflected in the stock price. Inflation is the cruelest tax of all because it has decreased the real value of wealth. Yet if an individual stock holder sells his stock at a price above his cost basis which is never adjusted for inflation that portion of his gain attributable to the retained earnings factor is taxed a second time and that portion of his gain attributable to inflation which in not a true increase in value also gets taxed. That portion of his gain attributable to the premium or increase in the value of stock aside from those two only gets taxed once. Of course any accumulated wealth that resulted from the owning of stock gets taxed again at death.
If you add in any state and local income taxes into the equation, the total tax take by governemnts at all levels comes close to consuming overf 90% olf the amount earned by the corporation in the first place.