Re: Cutting Taxes to Spur the Economy

From: Brett Paatsch (
Date: Sun Jul 06 2003 - 18:20:26 MDT

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    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
    at least.

    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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