When I was a boy there was one kid in our classroom who seemed to always ask really good questions. For example, when our science teacher informed us that the Earth was tilted on its axis by 23 degrees, he immediately raised his hand and asked “With respect to what?” That same question had popped into my head, but I was too timid to ask it out of fear of being laughed at about something that others seemed to understand. In contrast, he was bold and brazen. What’s more, the teacher did not know the correct answer. She replied “With respect to the North star.” That reply did not settle the issue for me, and I’m certain it did not settle the issue for the bright kid. After some digging, I discovered the correct answer was “with respect to its orbital plane around the sun.” On another occasion, he asked what happens to part of the contents of a can of soup if the can becomes dented? Once again, the teacher blew the answer with the reply that the contents had “compressed” into the smaller space. More digging showed that although liquids do indeed compress ever so slightly under pressure, they actually push hard on their retaining surface until something gives. The tin must expand outward to create a corresponding amount of space, or the can will burst. The principle behind hydraulics comes to mind as an example of pressure being transmitted uniformly throughout a liquid in an enclosed space.

The elements of economics are not as precisely predictable as are the laws of physics, but it too has hidden principles at work that require a deeper understanding than merely going with whatever seems to fit the circumstances.  Optimality is one such principle.

Optimality in economics generally means we don’t get something for nothing when all parts of the whole are functioning efficiently. In that respect the economy is analogous to a gasoline combustion engine. When it is finely tune for peak performance, neither engineers nor you can tweak it further for additional efficiencies. Make any changes at all, and performance measures will fall. (If I do the tweaking, that engine will almost surely sputter, back fire, and stop). In like manner, you cannot make changes in the tax laws that will benefit one group without a corresponding loss to others. This principle holds when money is diverted from one group to another. The tax code changes by the Trump administration are a case in point. You cannot merely assert that a tax reduction will pay for itself in greater GDP, more jobs, and higher tax revenues. In order for that outcome to take place, the tax cuts must be spent. But if the bulk of the tax cuts goes to the very wealthy that sum will have virtually no effect on GDP or jobs, rather it will result in lower tax revenues to the Treasury and in higher budget deficits. That is because those dollars go into investments (stocks, bonds, and real estate) which result only in increases in private wealth.

There are other interactions that tend to “level out” the more severe effects of a single solution to the optimality issue as it relates to taxes. They are:

• Taxes collected as a percent of GDP have remained flat for over 60 years despite different tax polices. Politicians who believe they can get something for nothing by giving more to one group at the expense of another group find they cannot, and the results are almost always worse.
• Total taxes collected remain the same while the burden merely shifts around between corporations, individuals and payrolls.
• The US debt gets larger each year as inequalities widen, so taxes as a percent of GDP cannot go down without severe economic and social consequences.
• Continued growth in debt is deflationary and is a main factor causing slow growth, low inflation and low interest rates.
• Attempts to create prolonged high prosperity for the elite at the cost of prolonged low incomes and poverty for the many is not a feasible outcome in a democracy. They can and likely will have major upheavals in the social order.

Money flows that go into lotteries or gambling also tend to have a negative overall effect on GDP, jobs, and tax revenues. Although they help employment in the lottery and gambling industries, those gains come at the expense of greater losses to GDP, jobs, and tax revenues in the much larger economy. Charitable giving to churches and charities also decrease tax revenues but they have a long-standing affinity with the American social order. Contributions to education (whether voluntary or by taxation) are the mainstay of the middle class and have a long-term positive effect on economic growth.