From: Brett Paatsch (email@example.com)
Date: Sun Jul 06 2003 - 18:20:26 MDT
Lee Corbin writes:
> However, my questions are
> 1. when should government print money
> 2. when should it reduce taxes *in order
> to* stimulate growth".
Dunno. But I think I can knock an edge of the second point
Taxes (in Australian and I imagine in the US) automatically
increase with inflation through what is known as the pehenomenon
of bracket creap.
Tiered tax systems impose different levels of taxation at each
of the thresholds crossed. Say 29% on income up to 29,999
32% on income up to 40,000, 38% on income up to 55,000
etc (the figures are not correct).
Point is in doing it this way the thresholds don't move up with
inflation. the purchasing power on 29,999 is less after a year
of inflation and so all things being equal salaries going up to
maintain parity with inflation see more income in real (not nominal
terms get taxed over time). In high inflation environments the
goverment collects more tax as a consquence of bracket creep.
So there are two ways of "reducing taxes". (1) cut spending.
(2) return the proceeds of bracket creep.
(2) is a political freebie. Pollies can do it without cutting
(1) Though is a separate matter. Whether one holds a
particular tax cut is going to be stimulatory depends in
part on what governement spending is not going to happen.
Welfare recipients may spend a higher proportion of their
income than the wealthy. Cutting welfare and dispersing
the tax breaks not back to the welfare recipients can end
up in putting the money in the hands of some not on welfare
including the wealthy who may be inclined to invest it rather
than spend it. If it they invest it wisely the net priming
effect on the economy may be sufficient to offest the
non-near certain spending that would have been made had
all the tax cuts gone back to the welfare recipients.
If you want to stimulate business investment there may be
better ways than tax cuts. But that means the government
is going into the business of picking winners. Personally I
think there are some categories of investmen, perhaps
increased funding to longer term R&D, or the NIH, where
the money may well have a greater pump priming effect
and also provide financing to sectors that would otherwise
develop more slowly.
- Brett Paatsch
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