Wednesday, May 21, 2014

Use of Feedback Loops in a SVGRTP

Chapter 3: Use of Feedback Loops in a SVGRTP

A feedback loop is a device created to monitor flow to and from an account. Earlier we defined taxes as cost of government functions and defined it as percentage of GDP. We now for the purposes of building a measuring device need to define taxes as a flow.  For the purposes of this discussion Tax flow (TF) is defined as d$/dt or the change in dollars divided by the change in time. 
Building the feedback loop requires the measurement of TF and depending where the measurement takes places, requires calibration (making time a reasonable increment for the flow going past the point of measure (POM)).
 Policy analysts, budget forecasters, and others certainly need to look at the change of the rate of tax flow but that is not a requirement for the simple feedback loop described here. The device measures current events, and does not determine causality or potential government actions.  Diagram 3 shows the feedback loop.

Diagram 3: Feedback loop

Governments create budgets and flow is TF = Projected Receipts– Budgeted Dollars for one year = Projected deficit or surplus. After a year has passed TF = Actual Revenues – Actual expenditures for the year (or fiscal quarter in some cases).

Citizens determine the priorities of continuous tax expenditures for one year with passionate debates over the funding requirements of critical government functions. Administrations then execute a budget, set the funding in stone; and hope projections of revenue are not too far off the mark.
If the same budgeting method exists and taxes flow to government from the SVGRTP then a government can use a feedback loop to change tax flow based on current fiscal phenomena. For instance if a government budgeted X dollars for say snow removal for X number of snow events and at the end of the winter season there were Y number of snow events for Y dollars, then the administers can react immediately to adjust tax rates or move money to other budgeted projects.
Feedback loops monitor tax flow and provide fiscal policy administrators an ability to adjust flow if and only if a SVGRTP becomes the primary method to collect taxes. It allows for intelligent control of scarce resources other than haphazard (at best) approaches we see today.

The feedback loop is a primitive mechanism and adjusting TF requires a skilled hand with knowledge of elasticity of sales tax. Put simply, lower taxes too much, receive too little tax revenue; increase taxes too much, receive too little tax revenue.

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