moneyFYI
Financial Freedom Is Merely Organized Common Sense
What Is The Best Question?
I understand that this can lead to paradoxical answers. Setting that aside, I think that one of the best questions is, “What Happens Then?”
The point to “What Happens Then?” is to make people notice that decisions and their results are not fully self-contained. They are part of a chain.
The first decision is “Do this. Get that.” Cause and effect. The thing to notice is that effect in step 1 is the cause in some effect 2 and the effect in step 2 is the cause in step 3 and so on.
“What Happens Then?” is the beginning of the defense to unintended consequences.
Many, probably all, decisions have unintended consequences. Some are visible before making the first decision, others not.
Here is an easy one.
Suppose a government raises the tax rate on interest income to 100%. If they get $200 million with a 20% rate, how much would they get with a 100% rate?
Answer – No More. Probably no revenue at all. The reason here is that tax revenue depends on two variables. 1) the rate and 2) the base to which it applies. Rates and revenue are not proportional unless you can hold the base still.
In the real world, if the rate is too high the base will go away. Thus no revenue at all. That is the first “What Happens Then?”
Because there is no revenue at level 1, there are some effects at level two. They derive from how the revenue went to zero.
1) What was previously invested in interest producing assets, will move to some other form of asset with a better tax rate.
2) The income will go underground.
3) The taxpayer will move to a new tax jurisdiction.
Each of the new effects will become causes. You can work out the effects for each, but let’s look at 3) – Taxpayer moves away.
The jurisdiction the taxpayer leaves will be poorer. Not only did the jurisdiction fail to get extra revenue from interest income for this taxpayer, they lost the tax revenue from all sources. (Salary, business, interest, dividends, capital gains, municipal tax, sales tax) With one taxpayer gone, those remaining must divide the total undiminished costs remaining. Each will pay a little more. There is at least one of those who had been close to deciding to move, who can then justify the aggravation. As that one moves it, makes it more likely that another will move. In the end, every person who pays taxes will move away.
Similarly, the jurisdiction who received the taxpayer will become wealthier at no cost. More income tax, more sales tax and so on. They can afford new services or lower tax rates. Either will attract people from other places.
Raising rates clearly has some unintended consequences. They are clear and the list above is incomplete. This is an example of imposing a tactic (how you get what you want) that conflicts with a strategy (What are you trying to do?). That never works well.
Case 3 is a little like football. When you lose momentum, it is hard to get it back.
How would jurisdiction 1 reverse the unintended consequence once it starts?
If there were an answer to that, and there might not be one, would it not make more sense do take that step before raising rates?
But, there is the ideological problem of appearing to be fair. More unintended consequences still.
moneyFYI 