The economy can be put into three segments. The Community, the government and the business sector. The business sector is the engine that drives the economy, the government makes the rules and regulations by which the country lives. The community works for the business sector or the government.
THE BUSINESS SECTOR
The business sector (The engine) will generate all the money required by itself and the government sector through sales. The government sector does not generate income but raises its funds through taxes levied on the business sector and the community. The economy actually only works one way and it will be found that while the business sector generates all the money and taxes in the system, the end market place for the business sector is the community and it is the earning capacity of the community is what drives the engine. This does not change, the exception is exports but even on a global basis the end product of all business will be the provision of goods and services to consumers. A country may export heavy machinery to import consumables but there is only the communities out there to buy the products of business.
The economy is really about the people of the community and their ability to earn an income. It is the spending power in the community that produces profits and taxes through the economic engine which is the business sector. When the spending power goes up the engine goes faster (boom) and when spending power goes down the economic engine will falter (recession). It is a cycle of events controllable by governments.
The business sector provides the goods and services required by consumers, itself and the government. More importantly, it provides all of the spending power to the community to purchase the goods and services produced, whether people are paid by the business sector or government. The more spending power it can put into the community the higher will be its turnover and profits and the greater the tax returns to government.
The concept is difficult to accept because many businesses are providing goods and services to other businesses and governments but at the end of the day the costs of these businesses and governments are eventually incorporated in the price of the goods and services bought by consumers. The end of the chain is the consumer. Business is about converting basic raw materials such as earth, water, plants and air into useable products but outside of business and government there is (at this time) only consumers to buy the end products. Businessmen may well consider their market to be other businesses in other countries but at sometime the sales are dependent upon consumer spending power.
The economy is not about international trade and profits, and the importing of goods and services because they can be made cheaper in other countries. Much store is placed on GDP results but GDP results can grow hugely with technology but unless there is sufficient spending power it will be of no avail. GDP needs to grow each year by population growth without any improvement in efficiency.
The economy is really about the earning capacity of the community and the spending power generated in the community. The community earns its money from the business sector and government and as the government gets its income from taxes it is reliant on the business sector to provide that income.
If the economy is opened to allow goods and services to be imported (free trade etc) then all taxes should be removed from business costs and put into VAT to bring local production costs down to compete and ensure equality of taxation between local products and imports. The community already pays most of the taxes, including income tax, through its purchases and nothing can change that situation. In addition to VAT , most other taxes are hidden in the price of the goods and services we buy and this includes taxes paid by individuals from their earnings.