How money movement creates revenue for government

| 10/06/2013

Let’s look at a day in the life of a single Cayman dollar bill. As our smallest valued paper currency it doesn’t seem like much but as you will see it packs quite a punch: Transaction 1 – It begins in the early morning when the dollar wakes up and goes to the coffee shop to be used in part of the purchase of a cup of juice and a newspaper. It goes into the cash register.

Transaction 2 – A coffee shop customer receives the dollar as change from her transaction. She then goes to the drugstore to fill her prescription. The dollar is used to pay part of her bill.

Transaction 3 – The next customer at the drugstore receives the dollar as change and takes it to the hardware store to buy some tools. The dollar is used to pay part of her bill.

Transaction 4 – The next customer at the hardware store receives the dollar as change and proceeds to go for a mid morning snack with her friends. She goes to a café and uses the dollar to buy a lemonade.

Transaction 5 – The next customer at the café receives the dollar as change and uses it to as part of her payment for groceries at the supermarket.

Transaction 6 -The next customer at the supermarket receives the dollar as change and uses it as part of  a payment to purchase her son a pair of shoes after she picks him up from school.

Transaction 7- The next customer at the shoe store receives the dollar as change and goes to the drug store to buy some lipstick.

The dollar continues to move for the rest of the day from store to store. So how does this measly little dollar pack such a big punch? The secret lies not in its value but in how many times it moved throughout the day.

Each time this dollar entered a cash register to purchase dutiable goods it generated revenue for government. At normal retail mark up, about 10 cents of this dollar will be used to pay government duty in order to replace the goods which it purchased. (Remember, the retailer pays duty on the wholesale cost of goods not the retail value, which is why it is 10 cents and not 22 cents).

As you can see, if the dollar goes though 10 cash registers a day for the purchase of dutiable items, the revenue is 10 transactions times 10 cents per transaction or one dollar per day in government revenue via future duty. The next day this same dollar has the potential to do another 10 transactions and earn another dollar for government. So now this measly little dollar has the potential to generate 365 dollars per year for government just by constantly moving every day. 

To be more precise, the movement is not the important part, it is the sudden stop at the cash register where it comes alive and does its work. When sitting idly in a purse or wallet it is just a piece of paper waiting to be used.

Each blue dollar bill is like a goose that lays golden eggs. Like the goose, it has to be properly nurtured and looked after. Constant attention must be paid to it and it must not be neglected or set aside. It performs a most valuable task in our daily lives and we need to take care to assure it is constantly used since it is by use that it gets its strength.  Now let’s see what could hamper this process and put a damper on this revenue stream. The dollar's ability to perform such heroic feats every single day is dependent on several factors. This dollar is delicate and must be treated with care and respect.

So how do we kill or slow down such a productive little piece of paper? There are several ways. First is to put it in a piggy bank or a drawer and forget about it. It is now a prisoner and cannot be productive. It means that its brethren who are still free will have to work even harder to keep up the revenue stream to government. The more dollars that are hidden away for a rainy day means the remaining ones have to work many times harder to keep revenue production the same.

Another way is if the dollar is sent far way for spending elsewhere. It is the same as putting it in a drawer or under a mattress except it can’t be used in the future either since it has left forever.

So what makes people take these potentially valuable dollars and hold on to them like they are gold? High prices are the culprit. When goods become expensive to purchase due to inflation or taxes, people tend to spend less and hold on for dear life to the few dollars they have. Parting with them only takes place out of absolute necessity. Once again, fewer dollars circulate daily which means less revenue for government.

Government has bills to pay too so their only recourse in view of less dollars moving is to tax and take a larger portion of sales revenue through taxes to make up the shortfall. This of course causes even more dollars to go under the mattress and reduces their ability to buy the same amount of goods as before the taxes were levied. This in turn creates an even bigger deficit for government as this revenue stream dries up. Taxes are higher than ever but they are producing less revenue than when taxes were low due to the daily flow of the dollar being halted by their owners.

The good news is dollars never really die, they just go into hibernation. Once incentives are given to their owners in the form of lower prices and bigger bang for the buck from lower taxes, then the dollars come out of their deep sleep and go back to work producing many times their face value in revenue for government.

Moral of the story: Lower the cost of living by lowering taxes. Revenue streams will grow automatically. It is human nature and the hidden power of the almighty moving dollar.

Jobs are created by business when business grows. Business grows when there is increased demand for goods and services. Demand for goods and services increases when prices are lower and need exists. Lower prices come from lower government fees and taxes. Lower government fees and taxes increases consumer spending. Consumer spending therefore creates jobs. Consumer spending is controlled by government tax policy. Government does not create jobs. It may make temporary work for a few but its policies are what control  job creation.

The unfortunate part is that when government finds itself in a financial bind as we are now, they fear that cutting taxes will reduce their needed revenue. Hopefully, what I have shown above is that it is exactly what the doctor ordered. Reducing taxes and lowering the cost of living will result in the badly needed revenue increases and jobs creation.

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  1. Anonymous says:

    Many commenters to this article beleive that local business are greedy and ripping them off. Yes, prices are high but that is because government has chosen to get to our income not through direct income tax but instead through taxing everything we use, and consume. From food to toilet paper and everything in between, the government is getting a big piece of the action. If instead we went with direct income tax then prices would be lower but you have less money to spend and be right back where you are, unable to afford anything.


  2. Annoymous says:

    There are no policing of the businesses to ensure that any of them will lower their prices, if Govt. reduces taxes.  Who checks? Not one living soul, that's who!  Businesses scream and shout about the cost of doing business, but yet they can put an item in the grocery store on special for $2.89 this week and next week it is $6.79, who regulates this??  We could do well with a Consumer Protection Agency that was a true watchdog and not one that can be influenced by the business community.

    • Anonymous says:

      You the consumer actually sets the price. Businesses who have competition are forced to sell at the lowest possible pricein order to get your business. If a business sells a product that his competition ia selling for less he either won't sell it or he will have to lower it. Reducing costs to business does result in lower prices  due to the competitve nature of free markets.

  3. Johnny Cake wid a Cup of Coffey says:

    "Consumer spending is controlled by government tax policy"…….I agree with this statement if this was the ideal world or the major countries with a central bank which is used to effect government policy on interest rates etc.  Unfortunately, here at home, some of our merchants affect consumer spending!  And boy are thy greedy.  Control them with A Fair Trade Act or similiar and we may make it somewhere.

  4. Anonymous says:

    Not sure if I agree with this economical utopia as the writer is suggesting. I do not have the answer either, but it appears that inflationary prices might be partially due to the differences in disposable income. This is not controlled by our government via tax, this is the true working of capitalism at its best. If it's becoming too much to bear, the market will correct itself. This may result in adaptation and making changes to behavior, taste, and lifestyle. Personally I have gone back to enjoying the basic and it is not that bad. So let the market correct the prices and with little government interference.

  5. Anonymous says:

    Transaction 19. The dollar is passed on in a bundle of notes to buy drugs on Mary Street. Guy gets high and thinks he has no problems….you see what happened there?…that one little dollar took away all our problems and did in only one day!!

  6. Anonymous says:

    Part of this analogy can also be used by the G8 countries trying to claw back their citizens monies invested through “offshore centres” They force their people to do away with their ofshore compaies/trust/funds etc.that is making money for them, bring back it back onshore so they can get their taxes off it. The money is placedin the onshore banks, stay there and wilt- no gains, they keep taking their taxes and pretty soon there is nothing left onshore. It is not a clear cut as that but you get the drift!! Much better to allow the money to go out and make more money so that the onshore client can have lots of money to spend in the onshore busineses- pay his onshore taxes that is appropriate and voila!! Everyone is happy!!

  7. Anon says:

    Tell me / us where on this rather expensive island I can find all these dollar stores cited in your submission? 😉

  8. Dred says:

    Interestingly written.

    I have always said the UDP government was basically brain dead.

    I get it that government expenses are high but government has to rely on the economic nature of things rather than doing the one thing any economist knows is a deathnell and that’s raising taxes during a recession. I have heard it must be a billion times now. YOU CAN NOT TAX YOUR WAY OUT OF A RECESSION. BUT…..You can TAX YOURSELF INTO ONE…

    For you to stimulate revenues and this is CIG and the Private Sector you must LOWER TAXES. In general by lowering taxes and offering incentives if businesses pass these savings on to their customers you will see increase in volumes which leads to increased sales for the businesses which in the end goes back to CIG in duties and the people being able to buy more government services and being able to pay their debts.

    UDP’s policy of TAX to SPEND was the root of so many of Cayman’s problems. It ENHANCED the recession and drove it deeper and longer causing many businesses to either shut down, relocate or cut staff which of course meant less government revenues.

    What happened was this…

    In year 1 when you hike revenues let’s say by 50% (not realistical but only to show a point) what you will find is that you do not get 1.5 times your revenue but maybe 1.3 times revenue as some businesses will fold and natural growth in the sector will shrink. BUT in year 1 your revenue grew and you were able to meet demands.

    In year 2 after a year of the hike more business fail and closure rate starts to increase. Some businesses opt  to cut staff and in the end you end up with 1.1 times your initial revenues and you may now just meet or fall short of your revenue goals BUT what you start to see that other sector cost are starting to rise and in the end OVERALL you are probably now only breaking even or even below overall target. Examples of this would be Social Services as people lose jobs due to business closures.

    By Year 3 the attrition rate of businesses are probably near all time highs as more and more businesses are closing and businesses are opting to not open during these difficult economic times and banks having more and more businesses fail with loans and having to do foreclosures start to pull the strings in offering less and less loans now make it difficult for those who may have considered risking it to get loans to start up.

    By Year 4 the government is worse off than when they started and now start to consider even more taxes to start the cycle over again.

    My point in all of this is….Raising Taxes is all but never the NEVER the answer. The only time raising taxes becomes the answer is when you are trying to punish a particular item that exist legally in the market for the problems it creates in an effort to either lower it’s consumption or raise revenues to offset the cost it generates. Examples of these would be cigarettes and alcohol.

  9. Anonymous says:

    See this crisp dollar?  It is going straight into my bank account.  It is then going to be wired to another offshore country where it will sit until I am back home and need it.  Lovely lovely crisp dollar.  Ever dollar spent in Cayman is a dollar not saved, and that is a failure in my book.

    • Anonymous says:

      and there we have emphasised the economic scuicide of our addiction to foreign labour, particularly when Caymanians can fill the role. 

  10. Anonymous says:

    It is as if the concept of economics was being grasped by a 6 year old and they put their school essay online. 

  11. Anonymous says:

    Sorry dont get this….

  12. 101 says:

    Great effort. However what you are describing appears to be whats known as the velocity of money which relates to how quickly money changes hands. But you seem to be implying that it is a muliplier which is a bit confusing. The general idea behind the article is a good one, keep it up.

  13. Anonymous says:

    Fascinating.  So if I give you a dollar and you give it back to me we have added two dollars to the economy.  Yippee!  


    I believe this is what as known as "the economist's circle jerk".



  14. Anonymous says:

    This article makes no sense. What you are talking about is the multiplier effect. However, a retailer simply giving out the same dollar in change has nothing to do with this. A multiplier would occur if the retailer took the dollar and then paid it to their staff in wages, with the staff member subsequently spending the dollar on-island themselves. In this instance the multiplier is likely to be much less than suggested by the article.

    • Anonymous says:

      Very wordy story but in the end you ask government to cut taxs.

      Right now Government has big problems balancing the budget and you have come up with a way to help the poor man. Fine but you will also be the one that will attack Government when it cant balance the books.

      And in the end some poor civil servant gets his job cut.

      • Anonymous says:

        I think the article is saying that the governemt would benefit from more revenue if the economy were to begin expansion through lower costs. All would benefit including government.


    • Anonymous says:

      You my friend is correct. This article makes no sense and is borderline dangerous if read by someone who has no idea about finance and economics and believes that this person actually knows what they are talking about. The Tea baggers in the Republican party have been touting this crap as gospel and it is that kind of thinking why we are in the mess we are today and the writer and his/her article is part of the problem and not the solution.

      Firstly, the writer is assuming that government is the ONLY reason for high cost of living. There are already many items that the government charges ZERO duty on where the prices charged by retailers are out of this word. How do you lower the duty on those items when they are already zero? What about the greedy merchants who rip us off on daily basis? What about the oil companies that literally takes us for a ride every day?

      Rather than spend that much time on such an article, why not research how the government can regulate them or bring in price controls to reduce the costs charged by these corporate criminals? While you are at it – go and research what multiplier effect is and you will see that there is no way the government makes a dollar from every dollar that is being spent. Where have you been living Penny? Pound wise and Penny foolish.     

      • Anonymous says:

        Please list the “the many” items that government charges zero duty on. While your at it please tell us what fees/duties have been raised. Is the net effect higher or lower taxes? Is the net effect a higher or lower cost of living to people in businesses? And with all these increases are we better for it or is the economy still in the crapper? As a “greedy” merchant myself, I can tell you that its no longer about being profitable, its about survival. One of our biggest expenses is labor and as the government keeps increases their fees ( which I have no control over and have no choice whether to pay or not) the only way to offset those increasing expenses is to cut back on staff and try to do the same with less. But hey I’m probably lying and you’ve got the conspiracy all figured out. Me and all those other greedy business owners are actually sitting on piles of money that we’re just too greedy to share and we need the government to regulate us more to fix us. Because the government is so efficient and effective in everything they do.

        • Anonymous says:

          If one of your biggest expense is labor it means that your staff costs would be impacted by salaries/wages, pension, health, work permits, bonus, etc. You already said you are "greedy" so ut means you are not paying any bonus. We can cut that costs out. Pension has been 5% for how long and that has nothing to do with government. Unless you have CINICO, your health care costs have nothing to do with govt. If you do have CINICO, play more and let the country stop subsidizing your costs. If you are paying a lot for work permits, go and hire Caymanians. They are a lot of talented Caymanians that are either unemployed or underemployed.

          The problem with you greedy merchants is that you expect government to provide the services that lose money while you guys provide the services that make money. That belief is what got us into this problem. That belief, made famous by Ronald Reagan, does nothing except create a country of whiners, create strife in society, and does nothing to increase productivity on this island. It is that whining that is supported by PPM, UDP, and C4C leaders in this country why consumer confidence is so low. By the way, have you ever thought that the reason why you are struggling to make a profit is because you are wasting time reading and commenting to articles probably written by retired persons like me who sit in the comfort of my living room and blog all day with not a care in the world because I am rich and bored? Go see your customers. Get from behind the computer and then, maybe then, you wouldn't be struggling to survive.   

          • Anonymous says:

            Are you married?:)

          • Anonymous says:

            I believe it was you who first made the comment that so many merchants here "greedy".  I used that word to describe myself as sarcasm, but it was obviously wasted on genius such as yourself (once again, sarcasm).  

            I do in fact pay performance and Christmas bonuses.  Pension and health insurance is mandated by the government and is not me or my employees choice whether to pay or not.  Therefore it has everything to do with the government.  So instead of me being able pay my staff more and letting them decide what to do with their money, the CI Gov has created a cartell of pension funds ( who get paid commisions regardless of how poorly they perform) and health insurance providers.  

            There are roughly 2,000 unemployed Caymanians and 20,000 work permit holders.  What does that tell you genius??  I'll give you hint, unless 18,0000 more Caymanians suddenly join the workforce then there are still going to be lots of work permits out there.  

            20 years ago the government was completley solvent and the cost of doing business was very low compared to today.  Now it is exponentially more expensive and guess how many more services I get from  the government.  That's right genius, none.

            Lastly, what I do with my time, whether it be trying to earn a living or responding to geniuses like yourself is completley my choice.  But that's the difference between me and you.  I could care less what you or anyone else chooses to do so long as it doesn't harm me or anyone else.  You and your like, on the other hand, want to impose your views and opinions on everyone else, because once again your just so damn smart.

            • Anonymous says:

              Goodness gracious. No wonder this country is in a mess. The person up there already said that he is "rich and bored" and have nothing to do. Why do you even waste time responding to him/her? S/he is retired and already lived their life. You need to go and get one.

              My fellow Caymanians, please go and support local businesses so that this person can get something to do. While you are at it, please go and visit the elderly so that the other one who is sitting in their living room, probably in their underwear, will have an outlet rather than use this forum to argue or oppose everything.

              Both of you need to get a life!!

      • Anonymous says:

        The Premier has gone to London to ask permission to lower taxes on Fuel and Duties because it is a fact that increasing them by the UDP caused the shrinking of our economy and closure of hundreds of businesses. Reducing taxes is good for the economy and does create lower prices.

    • Penny Spent says:

      You mis-read the meaning of the article. It is not about the 'Multiplier Effect". It is about how a single dollar is worth much more than its face value to government and the immense revenue producing potential each dollar has by merely being transacted. I further stated that lowering costs to business and consumers results in more spending power and lower prices. HIger demand and more revenue for government. That's all. Simple. Everyone aggrees that taxes are a blockage to economic growth and it is only through lowering taxes that we can allow our economy to recover.

  15. Dennis Smith says:

    Nicely done, true but we have no way to significantly reduce all of the fixed, near fixed and entitlement spending. So how do we pull this bit of magic off?