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Critical Analysis: A How-To Guide

Before we can critically analyze the validity or viability of ideas, it helps to have a lot of ideas. Why is this an important point? Because too often we are critical and analytical during the idea-generation process, which stifles our creative output. Let your mind run free then, and only afterward tear into what it produces.

You don't need to analyze everything you believe all the time, but at some point you do have to judge on their merits the beliefs and ideas that you and others have, and this is where critical analysis is needed. One of your primary tools for this should be challenging questions, including the following four:

1. Are there other factors involved that are not being considered, and what might these be?
2. What real-life evidence is there for the principle, proposal or idea being considered?
3. How does the way in which the principle is implemented affect its viability?
4. What arguments can you make against the principle or idea?

In part, critical analysis has to include attacking the idea or belief. It may be a bad idea, after all. How would we know if we never challenge it? Also, some ideas will become better ones if we attack them as they are and then refine them according to what we learn in the process. An example of the forming of a new idea and the analysis of that idea follows.

Most people assume the truth of the basic principle that governments can collect more revenue by raising the rates taxpayers pay on their income. It seems a reasonable assumption, but lets challenge the idea and look for possible flaws. One way to do this is to test it by taking it to an extreme: suppose the tax rate people paid was 99% of income. It seems clear enough that they would not bother to work too hard if they only kept 1% for their efforts, right?

So how much in taxes could be collected if the people stopped working? More would be collected at a rate of 20%, right? The principle is thus shown to be invalid in its extreme form: raising tax rates will not always result in more revenue for a government. We can also easily imagine that if high taxes discourage business expansion, or drive businesses to other countries, there will be less income to tax, so lower revenues could be expected due to this effect as well.

At other extreme, a 1% tax rate would also less revenue than a 20% rate. In considering these two extremes we come upon a new idea or principle: Taxation which is most efficient--collects the most revenue--has to be at a rate somewhere between the extremes. There is also an important idea which follows from this, namely that anything below or above this maximum-efficiency rate actually means a government will have less total revenue.

These ideas suggest the need for a more scientific approach to taxation in general. It seems a tragedy to raise taxes and so hurt the economy and taxpayers, lose jobs (higher taxes cause businesses to cut back), and then get no actual gain in revenue. After all, even if we want every social program imaginable, shouldn't we want a tax rate that collects the most money to pay for all those programs? In other words, if the goal is not something else (like punishing certain classes through taxation), but is to raise the most money for doing whatever we want the government to do, there is a rate of taxation which--when we go beyond it--defeats that purpose rather than helping it.

Let's use our four questions, to see how we might refine this idea through critical analysis.

1. Factors

Perhaps the tax rate which is most efficient is 20% right now, which could be partially determined by testing over the years. On the other hand, there are other factors involved. For example, if more of the revenue a government collects is spent for things like new roads and bridges, instead of wars and welfare, there is a bigger positive economic impact. The result can be a bigger economy to tax, so we might find that a tax rate of 24% is the "sweet spot" where the most money is collected. If we are to design a scientific tax system then, we have to take into account how the revenue collected is spent, since some uses lower or raise the rate that is most efficient.

2. Plausibility

What are the odds of constructing a scientific tax system, based on finding the most efficient tax rates (and perhaps the best types of taxes as well)? We have to recognize the reality that the tax code is used not just to raise revenue, but to encourage or discourage certain choices citizens make. That's why there are deductions for kids and mortgages, and credits for investing in oil wells and wind power. The tax code is designed to buy votes as well, as when politicians pay for votes of the struggling and envious masses by punishing the wealthy with higher taxes (perhaps even while knowing that those high tax rates hurt us all in the long run). The other difficulty is in educating the public; no more than 5% of people truly understand that raising tax rates doesn't automatically raise revenue for the government.

For this idea of scientific taxation to be plausible then, would require changing the political atmosphere, and educating millions of people who vote. That might mean enlisting the help of politicians who are serving their last term and therefore are not worried about their political future.

3. Implementation

Do we stick with just an income tax when we implement scientific taxation? Considering the incentives and disincentives involved, what would create more revenue, an income tax or a sales tax? The former might encourage working and investing more, while the sales tax could discourage spending. It's tough to say which would be best from a tax-revenue perspective.

The total tax burden on citizens has to be taken into account too when figuring what revenue a national government might generate--people are taxed at state and local levels as well. Could laws limit the rates that states and localities tax us at, in order to keep the total tax burden at that efficient sweet-spot we are looking for? We might also leave it to the states and let them compete for residents and businesses, which should put some restraints on their tax raises.

4. Arguments

Always find arguments against your own ideas and beliefs. It's a crucial part of critical analysis. So after we consider the three questions above, we need to look beyond them for any arguments someone might have against the idea of scientific taxation. We might find answers to those arguments, or we might find that we missed something important.

It could be argued, for example, that despite later effects, raising tax rates now means we'll immediately collect more revenue this year--probably true, since the damage is done to the economy going forward, and therefore the drop in revenues will come a little later. Of course this is something like saying we can have more food by eating our seed stock--not a great argument or plan.

Perhaps a government shouldn't have raising the most revenue as a primary goal. It is only necessary as long as we believe the ways in which it will be spent are better than the ways in which the people would have spent their own money if they had been allowed to keep more of it. It's a good point, but in nay case the scientific approach would still show when we are going beyond the efficient rate and causing more harm than good, while leaving us free to tax ourselves below this rate.

The argument that we need various taxes for various purposes is a strong one. The gasoline tax, when used to build and maintain roads and infrastructure, is a great way to fairly tax those who benefit most from those expenditures. Of course the idea of finding the most efficient tax rate for a sales tax or income tax doesn't exclude the possibility of other taxes based on other purposes.

Always look for arguments for and against against an idea in real life examples where similar ideas have been implemented. In such historical examples we can see what didn't work and try to decipher why those failures or problems existed, or see what did work as our ideas suggest they would. Then we can further refine our own ideas to avoid similar failures or limitations, and model the successes.

By the way, there have been real examples of countries lowering their tax rates and thereby collecting far more in revenue. One was during the Reagan presidency (although the government spent it even faster than the new collections came in). Another was in Iceland, where they systematically reduced the corporate tax rate from 60% down to 15% and collected more in tax revenue every step of the way due to increase business activity.

Critical Analysis Exercise

Here's a simple exercise you can try out your analytical skills and your ability to think of new ideas:

It's commonly assumed that there is a deterrent effect from putting people in prison for their crimes, and this principle is easily demonstrated with an imagined extreme example of no jail time for crimes. Would some people commit more crimes in such a system? Certainly. This simple mental exercise shows us that the principle of a deterrent effect is valid in some contexts.

For this exercise, however, think further about how to measure this effect, how to enhance it, or how to change the more general principle that punishment deters, whether in the context of jail or with children, etc. Generate a few interesting ideas, the choose the best one (including closely related ideas), and use the critical thinking techniques suggested above to refine or possibly reject your new idea.

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