What does WalMart have to do with Taxes? … Everything

I have spent a considerable amount of time thinking about the implications of our tax code and the reasoning that we make the political distinctions that we do. Bear with me and see if I challenge some of the standard dogma of both of the major political parties.

How does Walmart make money? This is an interesting question that many people have probably never thought of before. Most people think that because of their sheer size and the volume of products that they sell, Walmart beats up their suppliers for a better price on goods. While this is true to a marginal extent, it is not what is responsible for the majority of the profit that they achieve.

The source of most of the profit for Walmart, or any other major retailer for that matter, is the concept of inventory turns. Basically this concept takes into account the profit margin (selling price – cost) multiplied by the number of times they can sell this item in a given period of time. For example, if a bottle of ketchup yield a profit of 25 cents and sells 5 units in a month the monthly profit for this item $1.25 for that period. What Walmart does is reduce the profit margin in an effort to turn the inventory more times in the same period. They may reduce their profit margin to 15 cents per unit and increase the turns to 10, which would yield $1.50 in profits for the same period.

This is how these major retailers make money. This is also why the store shelves are always changing at these stores, and why some of your favorite items are not being carried anymore.

How does this apply to taxes? Well the answer is everything. The same principles apply.

It is known as objective truth that every time the marginal tax rates of the federal tax code are reduced, the actual revenue (the amount of money that comes into the government) has increased. The most recent examples of this are in the Kennedy, Reagan, and Bush (43) administrations. The reason for this was simply that the lower tax rates (profit margin) resulted in more inventory turns of each and every dollar throughout the economy. Basically if you had the opportunity to track a single dollar bill through the economy, you would actually see an increase in the number of people that actually paid taxes on that same dollar over that year.

What I have said so far is not rocket science. Most economists will agree with this theory – but now the rub.

Most of you know that I am very fiscally conservative, but this is something that neither the democrats nor the republicans ever talk about. Why do the politicians always think they need to justify a tax cut with a spending cut to “pay for” the tax break? If you see the validity of the economics, it never needs to be done. Now don’t go thinking that I am not for reducing the size of government, but this is not the argument for that. At the current rate of taxation, we should be able to reduce the tax rates AND increase the amount of money available to fund the current programs.

The problem I have with the democrats is that they seem to be talking out of both sides of their mouths. On the one hand they want to increase the various social programs, which increases the demand for money. On the other hand they want to increase the overall tax burden in order to pay for it. We have seen that these two things do not go together. If they were to look at history they would be more truthful if they championed plans that reduced the marginal tax rates while still wanting to use this increased revenue on their social programs. Why do they not do this? I can only think of a couple of reasons.

The first is ignorance. Notice I did not say stupidity. Maybe they are simply ignorant of the economic principles that are working in their midst. This is an indictment of the educational system that most of these politicians grew up in. They just might not know any better.

The second is that they might understand, but they do not believe that the ignorant masses of people can understand the concept. This speaks to both a condescension and an arrogance to think that people cannot grasp the finer points of this discussion. While many people today are woefully ignorant of economics, they should not be left out in the cold when it comes to the opportunity to learn.

The third is the most irritating – Disingenuousness. What I mean by this big word is that some of these people my know better, but in an effort to gain power and control over more aspects of more peoples lives, they use a lie to incite class warfare in order to further their cause. Unfortunately this seems to be the reason for many of these people’s position on taxation.

As an example, I watched in agony as Bill O’Reilly interviewed Barack Obama about this issue. Mr. Obama’a line in response to the evidence of increasing revenues with tax cuts was to harp on the simplistic idea that the deficit spending in the current administration had increased and therefore the actual GAO numbers showing an increase in revenues must be wrong. These were not his exact words, but it was definitely the point he was subtly making. There are so many logical fallacies here that we could not go through them all, but basically since the evidence did not support the contention of Mr. Obama’s position, we are to believe that his policies would be better for our economic progress. He did not attempt to deal with the mammoth increase in federal spending on both domestic and military spending that actually grew more than the increases in revenue.

While we should not necessarily base our opinions entirely on the data from the GAO, we should not give anyone credence that does not even attempt to break down the circumstances that have caused so much havoc in our federal budget.

As much as our society want to malign Walmart, rightly or wrongly, we should recognize that they have an example that we should all follow when it comes to taxes. Maybe we can use this analogy to increase the economics education of our neighbors.