Taxation

Good Evening!
    I want to begin with three announcements. 1, I guess I just made the decision to make this blog a bi-

weekly thing. Cool? Cool. 2, I think I want to start making my posts spaced... easier reading. Cool? 

Cool.

3, I'm a liar.

Ok that was a little strong.

Fibber? i'll take it.

How about overly ambitious... I like that one!

I'm not going to write about Detroit today, not because I don't like the issue. I want to pursue it. But I 

think that before I tackle that monster, I want to do a quick lesson on taxation and drop a little factoid. 

Cool? Cool. 

Let's begin. I was strolling through the mall with the parents today when I came across a book stand

sitting as a kiosk when I asked myself "What is with the serious lack of book stores here in Chile?" I'm

not sure if my fellow study abroad companions have realized this themselves but finding a good book 

to read (in print) is REALLY HARD! Your options are buying them via internet retailers or stumbling

across tables set up in allies with used books scattered on them. I just paid $14 bucks today for a used 

paperback Published in 1992! (Doce Cuentos Peregrinos- Gabriel Garcia Marquez) So someone please tell me what is up?!

Just kidding. 

I guess that's my job.

Chile, during their dictatorship under Pinochet (December of 1976), placed a 19% VAT on all books... 

Let's see how that compares to other countries.

(source: Fundación La Fuente)

Now why would a dictatorship do that? 

If the answer is glaringly obvious, snaps for you.

If not, let's talk taxes.

Taxes play an important role in our daily lives. We use them to create income for the government! 

That's how we get our nice paved roads, free schooling, you know that. But let's discuss another lesser

known function of taxes. Yes it's glaringly obvious that taxes raise prices, what isn't obvious is that

taxes can be used to discourage behavior. Which is just a result of prices rising. But on a free market, it 

leads to dead-weight loss. Let's look at the following as an illustrated example.

A Market in Equilibrium

This market is in equilibrium, the amount supplied is equal to the amount demanded and everyone is happy.

Taxation

The cube we see when multiplied for area is the Tax Revenue the gov't earns while that triangle 

describes the dead-weight loss. Dead weight loss is "The cost to society created by market

inefficiency" (investopedia.com). These are the effects of markets not working freely. 

An important exception that we need to briefly discuss are Pigovian taxes. These are nothing more 

than taxes without Dead-weight loss. This is the answer to your maybe lingering question, what cost 

does society bear when cigarettes and alcohol are taxed? The government implements vice taxes to cut

back on consumption on things are dangerous (Second hand smoking and driving under the influence).

An Example:

Source: BYU Idaho

We see here that the market quantity is less than the social optimal, so in a real world example... before 

cigarette taxes were enacted, there were more cigarettes on the streets than there should have been. So 

the government cuts back on the market amount and tah dah! We have a social optimal. 

So with those two concepts out of the way we can get to the more accessible part of the argument. 

Why tax books?

Well as mentioned earlier, this was enacted during a dictatorship. A dictatorship that was placed 3 

years after a communist leader was democratically elected in Chile. So it was in Pinochet's best interest

that the public wasn't reading! If no new ideas were entering Chile, it was much easier to manage civil

disobedience.

The Effects:

Source: Fundacion La Fuente

The title reads: If the books didn't have the VAT, would you buy more? The results speak for 

themselves as 53.7% of respondents would probably buy more. But where do those who want 

paperback books go? 

Remember when I brought up the street vendors? 

Instead of people waiting in line at big chain book stores (which really do not exist here in Chile) for 

the newest big hit novel, we have people like me going into the park and buying from an improvised

book store. No no no I'm not some rogue consumer, these book stores aren't touched by authorities.

But that doesn't mean there isn't a problem. Books not entering the hands of the public is a social

injustice that has to be addressed immediately. The poorest Chileans will go years without seeing a 

paper back unless the government enacts reform. But what is taking the Chilean government 23 more 

years to instill change? Your guess is as good as mine.

Remember! Thought's, comments, compliments, insults (keep them clean)... you know where to put 

'em.

Over and Out.

Chilean Inflation. Explained? (Fingers Crossed)

“What’s in Chile?”

            I asked myself that when I was applying. Chile, to me, lacked the glamour factor afforded to Argentina and Brazil and the historical aspect which Peru and Colombia boast. Chile, to me, was a mystery.

            However after completing my first reading for my Contemporary History of Chile. I learned that Chile had quite the rags to riches tale the rest of South America lacks. 

The title of my reading: “Hyper-Urbanization of Chile and the Political and Economic Consequences”

I knew what urbanization was, I remember reading in 11^th grade APUSH about the urbanization caused by our industrial revolution that lead the U.S.A to become a leading economy by the 100^th anniversary of the Declaration of Independence. How could a country suffer from Hyper-Urbanization?

Chile had an urbanization process unlike any other. But in order to understand the process, wee need to take an additional step back (I’ll be brief). Chile was plagued by a semi-feudal system that lasted up until the mid 1800’s. The few rich had control over the economy and in turn, the politics of the country. The poor found themselves living on land they didn’t own working for people they didn’t respect. Something had to change.

The mechanization of agriculture, coupled with the rich grouping together in a small pueblo in the Cordillera called Santiago and on the coast at Valparaiso caused a massive rush of population into urban areas at an unbearable rate. Spending was through the roof and it was becoming a problem.

Wait a second… why wasn’t this good? It didn't take a Harvard Economist to come to the conclusion that massive amounts of spending was what our U.S. Economy needed to begin the slow climb out the '08 recession. It doesn’t take someone with a high school diploma to understand that more people spending more money leads to more wealth. What's going on?

Let’s see what the numbers have to say. In the years of Hyper-Urbanization (1900-1950’s) Chile found itself managing about 1%/year. All of this new amount of money being spent, you would think that Gross Domestic Product (Total amount of money spent in an economy) would grow much more

Why? Let’s check another statistic.

Along with Hyper-Urbanization, Chile was experiencing High Inflation (30-50% increase in prices). Prices were skyrocketing and the Chilean Peso was rapidly losing its value.

How?!

It all heads to the Equation of Exchange (M*V=P*Q ).

M is the total amount of money in the Economy (the dollar bills you and I and our bank has)

V is the velocity of money (how quickly it is spent, the higher the V the harder it is for banks to hold on the money you and I have because we keep on spending!)

P is the price level (Our inflation indicator) and finally…

Q is our index of expenditures (the amount we spend on goods and services)

With a little bit of multiplication we get…

(M*V)/Q=P

What does this mean?? Well if Q is our amount of expenditures, it must be pretty small if we have a huge increase in inflation. The data agrees

Just a reminder….

The average rate of inflation was 36% during the 1950s, reaching 84% in 1955.

And for GDP growth, as supplied by Carlos Seiglie, a Professor of the Economics at Rutgers University

“Ballestors and Davis estimated that the gross domestic product (GDP) per capita grew only at a rate of 1% per year from 1908 to 1957. Even though the real GDP grew at a rate of 3.9% per year from 1950 to 1972, the real GDP per capita grew at only 1.7% per year. Its  economic performance was the poorest of Latin America’s large and medium-sized countries.” (Seiglie Chilean Strategic Culture: The Influence of the Economy 4)

So even though we as the US experienced this same urbanization, we had a very different outcome. We didn’t suffer from high inflation rates and minimal growth. We became the world economic superpower because of it.

But why did we get away with it? What made the USA grow and what held up Chile? This is where it gets cloudy. Macroeconomists, like scientists, have to try and hold variables constant in order to test other ones. And when it comes to a macro-economy… they aren’t afforded the luxury of a government holding GDP constant or maintaining money supply.

The most popular theory is the runaway spending by government. Other economists blame the populace. But in the end it all ends with how fast money travels. While spending is good, too much can be harmful. Modern day examples are included in the table below.

I hope you found this helpful, informative, and maybe even… fun? Let me know what you think. Leave a comment!

Over and Out

Next Post: What happens when you have hyper… suburbanization? The Detroit problem.  

The Upside of Quitting

Good Morning!
     I hope all is well. Thankfully I don't have a post up today. I say thankfully because I have something I'm really excited to share. After doing a little chatting with my old Economics teacher, I am pleased to tell you that i'll be having an "editor" for my blog!
      Paul Graf was my Economics Professor for Introduction to Macroeconomics who I always found to be an engaging teacher always willing to go out of his way to ensure every student (even in a class of several hundred) understood the concept being discussed.  This made him the ideal person for me to reach out to and thankfully he accepted.
     With that said, I'll be working this week on my first "real" post but for the time being I wanted you all to take a listen and refresh yourselves (or discover) what economists call "Opportunity Cost" and "Sunk Cost" and why these two concepts arguably set the foundation to all Micro and Macro Econ concepts. So coming to you from NYC, journalist Stephen Dubner brings to us... The Upside of Quitting. Enjoy :)

Over and Out