Tax cuts to end fiscal stimulus: a fallacious opposition?

  • Thread starter brainstorm
  • Start date
  • Tags
    taxes
In summary, the effect of lowering taxes and increasing take-home pay is the same as injecting money through other kinds of government spending to stimulate spending.
  • #1
brainstorm
568
0
I was reading the post about fallacious contradictions such as reality being an illusion or truth being non-existent and the one that came to mind was the idea that tax cuts are a way to end fiscal stimulus by government spending.

Maybe from a tax-payer's point of view, they are simply keeping more of what they got in the first place, but from a fiscal economic perspective, I think the effect of lowering taxes and increasing take-home pay is exactly the same as injecting money through other kinds of government spending to stimulate spending. Either way, some people are getting more money in their bank accounts than they had the year before.

Do you think this qualifies as a fallacious contradiction or is government spending really the opposite of lowering taxes?
 
Physics news on Phys.org
  • #2
brainstorm said:
is government spending really the opposite of lowering taxes?
Macro-economically they are identical, in reality the government spending and tax cuts are targeted at different people and have wildly different effects.
 
  • #3
mgb_phys said:
Macro-economically they are identical, in reality the government spending and tax cuts are targeted at different people and have wildly different effects.

Are you sure about the different effects? Don't they both just end up as consumer spending eventually one way or the other?
 
  • #4
brainstorm said:
Are you sure about the different effects? Don't they both just end up as consumer spending eventually one way or the other?
Different consumers spend differently.
If you give back a few $M in tax cuts to Bill Gates it doesn't have quite the same effect as creating a million minimum wage jobs.

Suppose everyone was fiscally responsible and you gave them a tax-cut, they would use it to pay off any debts/mortgage and the remainder would be put in their retirement fund. That doesn't generate an economic recovery.
What you need is for people to immediately blow the tax cut in bars and restaurants generating income for businesses that employ lots of people who pay tax.

It's one of the ironies of economics that you need people to be irresponsible with money in a downturn and responsible in a boom!
 
  • #5
Tax cuts to the rich don't work. If you want immediate economic stimulus you have to give it to the people who need it. Look at the chart at the bottom of this page and see where the big bumps are. There are lots of types of spending that create more stimulus than the initial dollar amount of the expenditures, but they are directed at people who need to spend the money in order to make ends meet.

http://www.usatoday.com/money/economy/employment/2010-07-15-unemployment15_CV_N.htm
 
  • #6
There's a serious difference in terms of deadweight losses to the economy.
 
  • #7
mgb_phys said:
Different consumers spend differently.
If you give back a few $M in tax cuts to Bill Gates it doesn't have quite the same effect as creating a million minimum wage jobs.
It does if the money gets invested in companies and charities that create jobs. If he buys stuff with it, the money changes hands to the sellers of the stuff, and they in turn spend it or save it, in which case it gets lent out as mortgages that generate revenues for the sellers.

The big thing that prevents real-estate sales from causing fiscal stimulus is the fact that the mortgage is overvalued, which causes the payoff to result in a loss. If real-estate was traded in liquidity instead of mortgage debt, any sale would result in revenue. It's the fact that these mortgages were traded at a value-levels of futures that were never sustainable that has now put every property sale in the position of creating loss. If mortgages were discounted across the board to some pre-inflationary level, properties could be traded without loss - but that would require people admitting that pre-2007 appreciation was actually pure unsustainable market inflation, which they don't want to do as long as they think they can keep the money they made on the trading of mortgages during that time.

Suppose everyone was fiscally responsible and you gave them a tax-cut, they would use it to pay off any debts/mortgage and the remainder would be put in their retirement fund. That doesn't generate an economic recovery.
What you need is for people to immediately blow the tax cut in bars and restaurants generating income for businesses that employ lots of people who pay tax.
Well, that's a pretty short-sighted fiscal view. Another view would say that economic growth resulting from money blown in bars and restaurants is like trying to start a marathon on a stomach full of candy. Sustainable growth comes from stabilization of income levels and expenditures. Debt raises the ante for instability. When people default on a high mortgage, it makes a bigger impact than when they default on a lower mortgage or no mortgage at all.

If a sustainable economy could evolve from debt-reduction and deflation, it would be less vulnerable to income and business instability. People could lose their job or go out of business, or do seasonal or temporary employment without putting banks under stress. No one would have to be evicted from their house because economic crisis occurred, which would reduce the need for fiscal stimulus and other government intervention. Wouldn't all that be good for the economy, even though it resulted in less fiscal stimulus spending in the short-term?

It's one of the ironies of economics that you need people to be irresponsible with money in a downturn and responsible in a boom!

Perhaps it's even more ironic that if people can weather an economic downturn without becoming fiscally irresponsible, they might emerge from the crisis with a more stable, sustainable economy.
 
  • #8
brainstorm said:
It does if the money gets invested in companies and charities that create jobs. If he buys stuff with it, the money changes hands to the sellers of the stuff, and they in turn spend it or save it, in which case it gets lent out as mortgages that generate revenues for the sellers.

What is holding job growth back isn't a lack of corporate investment. Here are two sources which suggest that comapnies are investing the money over seas instead of in America:

The Great Decoupling of Corporate Profits from Jobs

Monday, July 26, 2010

Second-quarter earnings reports are coming in, and they’re making Wall Street smile. Corporate profits are up. And big American companies are sitting on a gigantic pile of money. The 500 largest non-financial firms held almost a trillion dollars in the second quarter, and that money pile is growing larger this quarter. Profits that plummeted in the recession have bounced back. Big businesses have recovered almost 90 percent of what they lost.

So with all this money and profit, they’ll start hiring again, right? Wrong – for three reasons.

First, lots of their profits are coming from their overseas operations. So that’s where they’re investing and expanding production.

GM now sells more cars in China than it does in the US, but makes most of them there. The company now employs 32,000 hourly workers in China. But only 52,000 GM hourly workers remain in the United States – down from 468,000 in 1970.
http://robertreich.org/post/863304269/the-great-decoupling-of-corporate-profits-from-jobs

« A Mid-Summer’s Reflection «
» The Poisoning and other links »
Stock Market Capitalization Exceeds GDP
Posted by John Lounsbury on 24 July 2010 at 9:00 am
10retweet

Barry Ritholtz offers this graph (courtesy of The Chart Store).

Barry offers no further comment with the graph, but I started to wonder if the "bubble" in capitalization could be explained by the increase in business done outside the country by U.S. corporations. I have read that about half of the earnings of the S&P 500 companies are derived from activities outside the U.S. It may be that smaller companies do a smaller percentage of business outside the U.S., but let’s use the same 50% estimate for all U.S. firms on average, large and small.
Read more: http://www.creditwritedowns.com/2010/07/stock-market-capitalization-exceeds-gdp.html#ixzz0v7fA1TVW
 
  • #9
I find it so funny when these "analyses" report that corporations, banks, or anyone else is "sitting on money." The implication is that the only point of money is to spend it and thereby stimulate job creation and growth. There is another point of money, namely to conserve it to avoid overexploiting labour resources and unnecessarily depleting people's freedom. Of course, people who don't feel free without income don't care about freedom when they're unemployed. Such is the irony of modern economies.

Nevertheless, no one with money to invest, corporation, banks, or individuals are going to do so until the real estate markets reset. What would be better for the economy generally, I think, is if the real estate markets would not reset at all but trade on a completely unpatterned way. That way, economic dependence on real-estate appreciation would not re-emerge. Free from that dependency, the economy could stabilize into something that could operate independently of boom/bust cycles in housing or any other sector.

The only way this is going to occur is if the people sitting on money get very comfortable sitting on it. That means basically writing off that money as permanently frozen, i.e. it may no longer be spent. If that were done, the supply-side would have to re-adjust to a reduced money supply and cater to demand at a deflated currency value. Until this occurs, consumers are just going to keep getting tortured by high prices and low income; which may actually be better for them in terms of creating fiscal discipline than people realize.
 
  • #10
brainstorm said:
I was reading the post about fallacious contradictions such as reality being an illusion or truth being non-existent and the one that came to mind was the idea that tax cuts are a way to end fiscal stimulus by government spending.

Maybe from a tax-payer's point of view, they are simply keeping more of what they got in the first place, but from a fiscal economic perspective, I think the effect of lowering taxes and increasing take-home pay is exactly the same as injecting money through other kinds of government spending to stimulate spending. Either way, some people are getting more money in their bank accounts than they had the year before.

Do you think this qualifies as a fallacious contradiction or is government spending really the opposite of lowering taxes?

Tax cuts are, by definition, a form of fiscal stimulus. Fiscal policy is the use of government expenditures and/or receipts to influence the economy. Fiscal stimulus is any policy intended to stimulate, or increase, economic output. If one cuts public receipts with intent to increase private expenditures, one has engaged in fiscal stimulus as a national policy.

Government spending need not be the opposite of lowering taxes, but it must be the opposite of increasing the private money supply. The public sector may spend money in one of two ways - by confiscation or loan from the private sector. If it does not acquire the funds by tax, it acquires them by bond.
 
  • #11
brainstorm said:
Nevertheless, no one with money to invest, corporation, banks, or individuals are going to do so until the real estate markets reset.

I wonder if the flowing graph suggests it might have already reset as often a lot of peoples net wroth is in their house.

[PLAIN]http://images.creditwritedowns.com/wp-content/uploads/2010/07/household-net-worth-vs-disposable-income.jpg [Broken]
http://www.creditwritedowns.com/2010/07/household-net-worth-back-to-the-old-normal.html
 
Last edited by a moderator:
  • #12
John Creighto said:
I wonder if the flowing graph suggests it might have already reset as often a lot of peoples net wroth is in their house.

That's an interesting comparison. Does "net worth" refer to the purchase price or recent assessment? What does "disposable personal income" refer to exactly? And how would this graph transparently indicate a market "reset?" It's as if you are suggesting that it's possible to just make a graph, compare areas on it and assume that the economics of the two situations are equal. There needs to be some analytical rigor here, doesn't there?
 
  • #13
brainstorm said:
That's an interesting comparison. Does "net worth" refer to the purchase price or recent assessment? What does "disposable personal income" refer to exactly? And how would this graph transparently indicate a market "reset?" It's as if you are suggesting that it's possible to just make a graph, compare areas on it and assume that the economics of the two situations are equal. There needs to be some analytical rigor here, doesn't there?

Disposable income as defined by both http://www.investopedia.com/terms/d/disposableincome.asp" [Broken] is simply the after tax income. Of course I wouldn't consider all this income disposable because it doesn't cover all living costs but it seems to be the standard definition. I would suggest that the graph is indicative of market reset in that the value of peoples assets should be affordable. The unfortunate aspect of this thesis is that housing costs are as much determined by what people can afford as the cost to produce them. This will not change until people stop viewing their home as a status symbol.
 
Last edited by a moderator:
  • #14
John Creighto said:
What is holding job growth back isn't a lack of corporate investment. Here are two sources which suggest that comapnies are investing the money over seas instead of in America:
You misread/misinterpreted those quotes. The jobs are being created overseas because the people buying the cars are overseas. Which makes perfect sense. It is illogical to invest the money in the USA if the people buying the cars are in China.
 
  • #15
John Creighto said:
Disposable income as defined by both http://www.investopedia.com/terms/d/disposableincome.asp" [Broken] is simply the after tax income. Of course I wouldn't consider all this income disposable because it doesn't cover all living costs but it seems to be the standard definition. I would suggest that the graph is indicative of market reset in that the value of peoples assets should be affordable. The unfortunate aspect of this thesis is that housing costs are as much determined by what people can afford as the cost to produce them. This will not change until people stop viewing their home as a status symbol.
Disposable/discretionary income is complicated because it depends on which products and services are more easily substituted and which are not. E.g. if someone's income remains the same but they are able to stop buying CD's and listen to the radio, youtube, or otherwise satisfy musical demand for free, their disposable income for other items goes up. The same is the case if they refinance their mortgage at a lower rate or if they pay off debt.

People don't just buy houses on the basis of status. They also buy cars, clothes, art, decoration, food, and anything else out of status concerns - if they haven't learned to live (relatively) independently of status. Also, the "cost" of housing may still be determined by status even if the price reflects the production cost, just because the land-price reflects status. So charting housing prices relative to disposable income is really just correlating one form of status with another, no?

The interesting economic question, imo, is how prosperous the economy could grow if status didn't overinflate so many commodities. Such a level of growth may not be good, but it would probably depend on how it was distributed. Imagine that everyone could invest their labor in the most efficient means of producing the most satisfying product without any concern for status. Wouldn't there be enough labor-power to generate total satisfaction for everyone on Earth?
 
Last edited by a moderator:
  • #16
brainstorm said:
Disposable/discretionary income is complicated because it depends on which products and services are more easily substituted and which are not. E.g. if someone's income remains the same but they are able to stop buying CD's and listen to the radio, youtube, or otherwise satisfy musical demand for free, their disposable income for other items goes up. The same is the case if they refinance their mortgage at a lower rate or if they pay off debt.
This is a suitable definition of disposable income but not the standard definition. As I said above the standard definition only refers to after income tax income.

People don't just buy houses on the basis of status. They also buy cars, clothes, art, decoration, food, and anything else out of status concerns - if they haven't learned to live (relatively) independently of status. Also, the "cost" of housing may still be determined by status even if the price reflects the production cost, just because the land-price reflects status. So charting housing prices relative to disposable income is really just correlating one form of status with another, no?

The interesting economic question, imo, is how prosperous the economy could grow if status didn't overinflate so many commodities. Such a level of growth may not be good, but it would probably depend on how it was distributed. Imagine that everyone could invest their labor in the most efficient means of producing the most satisfying product without any concern for status. Wouldn't there be enough labor-power to generate total satisfaction for everyone on Earth?

Well, people would pay less on houses which should give them more money to spend in other areas. Cars might be bought based on more practical concerns then trying to demonstrate your manhood or show how much you care about the earth. People would care less about band names. Perhaps some clothes would deliberately and outwardly display the brand name.

People of course buy things for other reasons besides status, so it doesn't mean that there still won't be a competition for the products of labour.
 
  • #17
John Creighto said:
This is a suitable definition of disposable income but not the standard definition. As I said above the standard definition only refers to after income tax income.

It would be more useful to understand how it is relevant - regardless of how "standard" it may be.
 
  • #18
brainstorm said:
It would be more useful to understand how it is relevant - regardless of how "standard" it may be.

What makes the standard definition relevant is that it is easier to measure.
 
  • #19
John Creighto said:
What makes the standard definition relevant is that it is easier to measure.

That makes it more convenient, not relevant.
 

1. What are tax cuts to end fiscal stimulus?

Tax cuts to end fiscal stimulus refer to the decrease in taxes implemented by governments in order to stimulate economic growth and activity. This is often done during times of economic downturn or recession in order to encourage consumer spending and investment.

2. How do tax cuts impact the economy?

Tax cuts can potentially have a positive impact on the economy by putting more money into the hands of consumers and businesses, which can lead to increased spending and investment. This, in turn, can help boost economic growth and create jobs. However, the effectiveness of tax cuts in stimulating the economy depends on various factors such as the current state of the economy and the type of tax cuts implemented.

3. What is the fallacious opposition in regards to tax cuts and fiscal stimulus?

The fallacious opposition refers to the commonly held belief that tax cuts and fiscal stimulus are opposing measures, when in fact they can be complementary. Some argue that tax cuts are a more effective way to stimulate the economy compared to government spending, while others believe that government spending is necessary in times of economic downturn. However, both measures can be utilized together to achieve the best results.

4. Are tax cuts always beneficial?

No, tax cuts are not always beneficial. While they can have a positive impact on the economy, it depends on various factors such as the current state of the economy, the type of tax cuts implemented, and the distribution of the tax cuts. For example, if tax cuts primarily benefit the wealthy, it may not have a significant impact on stimulating economic growth.

5. Are there any potential drawbacks to tax cuts as a form of fiscal stimulus?

Yes, there are potential drawbacks to using tax cuts as a form of fiscal stimulus. One potential drawback is that it may lead to a decrease in government revenue, which could result in budget deficits. Additionally, the effectiveness of tax cuts in stimulating the economy may be limited if consumer and business confidence is low, or if there are other economic factors at play. It is important for governments to carefully consider the potential drawbacks and weigh them against the potential benefits before implementing tax cuts as a form of fiscal stimulus.

Similar threads

Replies
204
Views
25K
  • General Discussion
Replies
19
Views
3K
  • General Discussion
4
Replies
124
Views
14K
  • General Discussion
Replies
6
Views
2K
Replies
7
Views
3K
Replies
2
Views
2K
  • General Discussion
Replies
15
Views
4K
  • General Discussion
Replies
18
Views
3K
  • General Discussion
3
Replies
85
Views
11K
  • General Discussion
2
Replies
69
Views
8K
Back
Top