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Big Tax Cut

 
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PostPosted: Thu Dec 04, 2014 12:46 am    Post subject: Big Tax Cut Reply with quote

PeakTrader:

The boost in government spending, along with the small and slow tax cuts, failed to jolt the economy into a self-sustaining consumption-employment cycle.

When there’s a mountain of household debt, after a long period of overconsumption, watching your $5,000 tax cut go into a few toilet seats for the defense department won’t help you much.

And, there’s nothing wrong with some saving, e.g. for retirement, a down-payment on a house, sending your kid to Harvard, creating a scholarship for a poor kid, etc..

We need more spending & saving and less squandering.

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2slugbaits:

"We need more spending & saving and less squandering."

Huh??? How do you simultaneously increase both spending and saving?

"There’s nothing wrong with some saving."

But if you want to increase private saving during a recession…say because households need to repair balance sheets and deleverage debt, then someone or some entity has to be willing to borrow that savings. If no one or no entity is willing to borrow that additional private saving, then you’re basically just shoving money in the proverbial mattress. During the Great Recession no private entities wanted to borrow. That left the government as the borrower of last resort. The government’s borrowing creates a deficit on one side of the ledger, but it also creates a financial asset on the other side of the ledger. The lesson that Keynes taught us and that too many economists seem to have forgotten is that for every dollar saved there has to be someone willing to borrow that dollar; otherwise money leaks out of the system.

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PeakTrader:

Income = consumption + saving.

Cutting taxes raises disposable income.

And, households paying-down debt raises discretionary income.

Also, I stated before, U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds. Not enough of those dollars were “refunded” to consumers to allow the spending to go on.

Generating demand through lower taxes, along with lower interest rates and lower prices, cause people to spend more and save less.

The U.S. economy has changed, since the Great Depression, when taxes were low and government spending was needed.

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baffling:

peak
“And, households paying-down debt raises discretionary income.”
it only raises discretionary income after the debt has been paid down. for most folks, do they ever reach the point where the debt is paid off so the money is turned into discretionary income? sounds great in theory, but in practice i don’t think the model you assume actually exists.

so the question really becomes, when you cut taxes how much of it is put back into circulation? as we have discussed on this blog before with steven, you need very targeted tax cuts. the wealthy do not “spend” that money-they already have plenty of disposable income. tax cuts need to go to the right people-they are not effective when broadly based or focused on the wealthy. a tax dollar collected is however spent on the economy.

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PeakTrader:

My proposal was a $5,000 tax cut per worker, or $700 billion for the 140 million workers at the time.

Each worker will use their tax refund the best way they see fit. Some will pay-off a car loan (most workers drive to and from work), others will pay-off credit cards (and likely use them again, because people with credit cards are more likely to spend), some will catch-up on bills, some will spend it all, some will invest it all (in the stock market or a business), some will donate it all, etc..

It’s a regressive tax refund. A part-time worker may receive a $5,000 tax credit, while a full-time worker pays $5,000 less in taxes. Would it be fair to expect workers paying the most in taxes to receive nothing?

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