[Kemal Ergenekon] eUS Economic Policy Needs Reform

Day 1,233, 12:49 • Published in USA USA • by Kemal Ergenekon
Vote & Subscribe to earn rewards of food, weapons and tickets.

Ekmek, silah ve bilet ödülleri kazanmak için V&S


Türkçe özet : Adamlara vergi oranlarının neden deli saçması olduğunu anlatıyorum. İmalatçıyı öldürüp, kaçakçıyı zengin ediyorlar.





eUS Economic Policy Needs Reform! : An Economic Analysis on Optimal Taxation under the New Economic Module


Esteemed readers of Ekonomi Politik and dear Americans,

eUS had one of the best economic policies up until the recent changes in the economic module. The high Income taxes, complemented with minimum import and VAT taxes empowered the American consumers, and allowed US citizens to consume the cheapest goods, helping their personal development. Also, the stability of the economic policies – something most countries lack - resulted in many investors buying licenses to the US.


Why was it the best economic policy of the time?


1) Income Taxes were able to generate respectable sums of revenue, and were more or less egalitarian, since labor income was the predominant type of income, save the rich company owners.

2) By taxing labor income which was perfectly inelastic, the government could raise the needed revenues without damaging allocative efficiency: Something that cannot be said for VAT.

3) 1% import taxes empowered consumers, and prevented national oligopolies that would have reduced efficiency. 1% VAT again caused the minimal Dead Weight Loss possible.

4) The incentives to trade on the black market were very low, which meant most of the people would trade on the marketplace and give %1 of each transaction to the government, except maybe for houses. Simple Laffer curve logic.

But things have changed. Significantly.





What has changed?

1) Labor income is no longer the predominant type of income. Hence income taxes are unable to generate the necessary revenues. Plus, the labor income taxes old and new players pay are more or less the same, as a result of the production function change a few months ago. So the egalitarian nature is no longer there – it mainly taxes the poor. It is still fairly inelastic though.

2) The US decided to raise Import taxes on *raw materials* and kept them the same in *manufactured products*, contrary to a long time tradition. I’ll discuss this thoroughly.

3) The latest economic module change created a new way to earn money, and by-pass import taxes: I prefer to call it “Smuggling”!





What should be done? Why do these matter?

In the past, import taxes were used to prevent foreign products to enter domestic markets. In effect, it hurt the consumers and benefited the domestic companies. In some cases it could have been defende😛 for example, if another country has a bonus that the domestic country doesn’t have, they could drive all the domestic firms bankrupt by selling the good in the domestic markets. So one could defend ( I wouldn’t) that in order to keep employment high (never a problem in eRepublik since v2), one needs to increase the import taxes a bit.

Never mind that it was more or less wrong in the past. Now, raising import taxes to really high levels is ***completely wrong***. Why? Because now the people can go outside the domestic country, buy the products cheap, and sell them on the domestic market without paying any import taxes. What I call smuggling.

What does this imply? Consumers lost as they did in the past, due to increased prices. Firms gained a little due to increased prices, but they noticed that they couldn’t sell the quantity they could sell in the past. So protection didn’t really help them. Who benefited? “Smugglers” or “merchants” with domestic citizenship, who just buy cheap and sell at a profit!

Why is this wrong? Because the “smuggler” did nothing at all to obtain this profit other than being clever and wandering among the prices a bit. If the foreign products were to be dumped in the domestic markets anyway, *why not tax it?* . How? Just drop the import taxes to a reasonable level (3-5😵 so that the foreign firms rather than smugglers can sell it. This way, the government gets the revenues, the smuggler is out of job, and the consumers and domestic firms aren’t hurt. Plus, the elimination of the middle-men increases total output due to increased efficiency.





Second problem: Protectionism in Raw Materials, Free trade in Manufactured Goods

Unfortunately, I won’t be able to hold my opinion back on this: There is absolutely no way any rational person can justify this. None at all. Economic theory is perfectly unambiguous on this issue. Let me explain:

Increasing raw materials import taxes increases the profits of the domestic raw materials producers. Do they deserve the extra rainfall? Maybe they do, maybe they don’t. That’s not the problem. The problem is, these high import taxes increase the raw materials prices. As a result, the unit costs of the manufacturing firms like weapons, food, etc. increase significantly. As if this weren’t enough, their markets aren’t protected.

The result, you ask? The foreign countries who enjoy lower raw materials prices produce and sell their goods in the US market. They have a huge advantage in unit cost due to not suffering from high import taxes in raw materials. And in the case of weapons industry, since the US doesn’t have an iron region, their advantage increases even more! As a result, manufacturing companies in the US, especially weapons companies, cannot operate profitably.

Moral: The import tax rate of a raw material must be weakly smaller than the import tax rate of the associated manufacturing industy. That is, unless you want to stop producing the manufactured good *altogether* in the US. In the case of raw materials which the US doesn’t have, the inequality needs to be strict.





Conclusions and Suggestions

The current economic policy of the US is regrettably suffers from huge inefficiencies which no one can justify. The consumers and manufacturers are ruined, whereas the smugglers steal a large chunk out of the pie. The 1% import taxes have allowed foreign countries to dump their cheap products into the markets, against which the manufacturer can do nothing, since raw materials import taxes are high.

In the long run, the “beggar thy neighbour” strategies of foreign countries, and the inefficiencies of the middle-men will ruin the development of the American economy, unless a reform in economic policy is made.

I would advise the import taxes and VAT to be the same in all industries, except the following exceptions:

1) Unless an iron region is conquered, the import taxes on iron should be 1%.

2) To prevent black market sales, the import taxes on houses should be 1%. The rule I mentioned earlier implies import taxes on stones should also be 1% as a result.

I personally would go with an import tax rate of 3-4-5% in most industries, according to the needs of the government. Again, the Laffer curve logic implies that government revenues from import taxes will increase when they are moved from %20’s to 3-5%, as a result of the increase in the volume of trade. Honestly, 20% and 100% are observationally equivalent. Any merchant worth his salt would either smuggle or use black markets to by-pass such a high import tax.

On VAT and Income taxes: Efficiency says VATs should be minimized and Income Taxes should be maximized. Distributive justice, and dynamic efficiency says it should be the reverse. A balance should be struck between the need to maintain high efficiency, and the need to help the poor and tax the rich.

All my analysis rests on years spent on economic theory. I hate to use authoritative arguments, but I do a PhD in Economics in one of the best institutions in macroeconomics, and my doctoral thesis is on Optimal Taxation. I would be happy to discuss any of my views, as long as you stick to using economic theory and rational arguments, rather than some rules of thumb imported from economic setups unlike the one we have in eRepublik.

The United States had one of the most efficient and successful economic policies in the past, and for a very long time. Let these months not be an exception. Let us fix the economy, before it breaks down. An economic defeat will surely result in a military one, as we will eventually find out if we don’t act soon.


Best regards,
Kemal Ergenekon