Could a 137-year-old equation explain the financial collapse?

By Bryan Kavanagh

The Australian Federal Treasury publication “Architecture of Australia's tax and transfer system” (August 2008) made a valid observation:

While there are at least a hundred taxes, they all ultimately fall on returns to owners of three possible factors of production; land or other naturally endowed resources (R), labour (L) or produced capital (K). The earnings of each of these factors make up the income of individuals, and when added up over the whole resident population for a given time period (t), the income of the nation (Y):

(1)     Yt = rRt + iKt + wLt

where r is the return to resources, i is the return to capital and w is the return to labour.

This was a good starting point for how the three factors of production rate comparatively as revenue bases, but the case was curiously ambushed:-

This framework allows for an analysis of the relationship between the two main broad bases of income and consumption.

Income and consumption taxes may of course bear upon each factor of production, so we shouldn't be diverted. Let's stay with the equation, because it has an excellent pedigree...

Read the rest — first published at On Line Opinion.