Macro-economic scenarios (4)

October 19, 2010

Refer to earlier posts for background: 1, 2, 3.

Baseline + taxes scenario

Assume that a certain percentage of every person’s income (in calories) is extracted by the authorities as taxes. If a person’s income is the bare minimum for existence, then their income must be increased by their employer to cover the taxed amount, if they are to continue in their jobs. If a person’s wages are beyond bare subsistence, which is almost always the case to some extent, in the sense that some additional privation can always be imagined, then some partition of the cost of taxes between the employer and the employed would have to be achieved, if the employment relationship is to be continued. In the short term, at least, it is probable that a large part of the cost of the taxes directly deducted from a person’s income would be carried by that same person.

Applying taxation to the baseline scenario, ignoring the short term effect, and assuming that farmers work at bare subsistence, the cost of all taxes fall on the landowner. Under taxation scenario A there are three tax brackets – all income up to 1500 calories per day is not taxed, income between 1500 cpd and 2500 cpd is taxed at 10%, while all income above 2500 cpd is taxed at 90%. Thus, each farmer costs the landowner 2050 cpd, leaving 50 cpd of surplus.

If the landlord decides to keep consuming 3000 cpd, he would have to employ 1500 / 50 + 1000 / 50 / 0.9 + 500 / 50 / 0.1 ~= 30 + 22 + 100 = 152 farmers. The taxes collected, 152 x 100 – 3000 = 12,200 cpd, could feed between 4 and 6 public employees, or, if distributed to the farmers, could add 12,200 / 152 ~= 80 cpd to the income of each farmer. If the landowner decides the he prefers to consume less rather than see so much of his land cultivated, he could consume 2500 cpd, employing only 52 farmers, and providing 52 x 100 – 2500 = 2700 cpd, enough to feed just one public employee, or increase the income of each farmer by about 50 cpd.

It should be noted that any tax redistribution to the farmers violates the bare-subsistence assumption and opens the door to decrease in their wages, increasing the surplus available to the landowner.

An extreme development could occur in which the landholder decides to do the farming himself, laying off all the farmers and consuming a mere 2050 calories. Such a situation would be much less likely to occur under taxation scenario B in which taxation starts only at 2000 calories (say, as in scenario A, at 10%, going up to 90% at 2500 calories). In that case, the farmers still cost only 2000 calories, allowing the landowner to consume 2500 calories employing 30 farmers (providing 500 cpd in taxes), and to consume 3000 calories employing 80 farmers (providing 5000 cpd in taxes).

Technology + taxes scenario

Under the advanced technology scenario, the outcome is less sensitive to the taxation at lower income levels, since under this scenario there is only one low income worker per landowner. In both scenarios the surplus easily suffices for taxes levied on consumption of up to 2500 cpd for the engineer and landowner. If their consumption is to stay at 3,000 cpd, however, 10,000 additional cpd would have to be paid in taxes, meaning that the amount of land farmed would have to be doubled to 20 plots. This, of course, doubles the number of farmers employed as well (from 1 to 2).

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