Sunday, July 29, 2007

Do tax cuts really put more money in your pocket?

Okay, back to Econ 101 again. As you may recall from my earlier posting on gold, the value of money is what you can buy with it. Gold was lousy as money because you can't buy shit with gold. Try it. Go down to your local store. Pick up a bag of potatoes and a bag of turnips, and go to the checkout counter. Give them gold. See them stare at it in amazement, then tell you, "I want real money." I.e., the green pieces of toilet paper with pictures of dead Presidents.

The value of any money, whether it's the green toilet paper or not, rests solely in what people will give you in exchange for it. Remember, the basis of an economy is the amount of goods and services in circulation, not the amount of green toilet paper in circulation. The wealth of a nation is the amount of goods and services in circulation, not the amount of green toilet paper in circulation. You want the amount of green toilet paper in circulation to pretty much match up with the amount of goods and services in circulation, otherwise you get deflation (good for rich people, bad for working people) or inflation (good for working people with no savings, bad for everybody else), other than that the amount of green toilet paper in circulation is irrelevant.

Okay, so Bush "gives" you a tax cut (actually, just pushes a tax hike into the future, since the money for the "cut" was borrowed). Are you really better off now? Well, you have more green toilet paper in your wallet. So the next question is, are there more goods and services in the economy for you to buy? Are you actually any better off?

The answer to that last question is "no." The amount of money in your pocket will buy exactly the same share of that goods and services as it did previously. You are no better off than you were before the tax cut because the money in your pocket will buy you the same amount of "stuff" as before the tax cut. All that happened was that inflation happened -- more money chasing the same amount of goods available for purchase means that the goods get more expensive, and you're no better off.

Now, if the government was actually cutting its spending on destructive activities -- taking fewer goods and services out of circulation and literally blowing them up and shooting them out of the barrel of a gun -- then there would be more goods and services in circulation in the economy, and a tax cut would be warranted so that the amount of money in circulation would match the amount of goods and services in circulation. But as we all know now, the Bush Administration has been spending like a drunken sailor, and mostly doing that spending in none-productive ways that do not provide goods and services to our economy (i.e. that do not create roads, bridges, provide police services, etc.), and so the government is actually taking more goods and services out of the economy and using them to blow up some god-forsaken desert that nobody gives a shit about anymore (except the people who live in that god-forsaken desert, of course, who are somewhat pissed and doing their best to get us to spend ourselves to economic exhaustion so that we'll quit blowing up their god-forsaken desert and go do something more productive). More green toilet paper, fewer goods and services, is it any wonder that the prices of food, housing, and fuel have been going through the roof?

Now, the next question is, "do tax hikes really take money out of the economy?"

Well, it depends on two things: 1) the extent of the tax hike, and 2) whether the tax hike is being used for some purpose that adds to the economy. For example, right now 15% of the U.S. economy is going to medical care. By imposing a 7.5% Medicare tax upon all payrolls and extending Medicare to all Americans, that percentage of the economy could be reduced to 10%, and the remaining 5% no longer going to insurance companies for non-productive purposes would then be additional goods and services available to the economy. So you'd actually be able to buy more "stuff" with the amount of money remaining in your pocketbook.

If the tax hike was gigantic enough to reduce the incentive to work (but we're nowhere near that -- the amount of our GDP going to taxes is under 30%, and you have to get above 50% before people start losing incentive to work for a living), or if the taxes were going to non-productive purposes such as being shot out of a gun or blown up, on the other hand, you'd be out the money but there would be no more (or fewer) goods and services in the economy. So you'd be worse off. So the answer is "it depends". But as long as you keep your eye on the ball -- the goods and services circulating in the economy, not the green pieces of toilet paper -- you're well positioned to be able to judge for yourself whether a particular tax cut or tax hike actually puts buying power in your pocket. And in the case of extending Medicare to all Americans via a Medicare payroll tax, it most definitely does put money in your pocket, because you get more services for the money taken out as taxes for half the price of buying it on the open market (where you don't have the economies of scale that the government has).

-- Badtux the Tax Penguin

1 comment:

  1. i tell people that, having actually qualified for a bush tax cut during a very good year, i didn't fucking notice.

    it made zero impact on my life. income to outlay remained pretty much the same. i didn't get a tax cut and say "shit i loves me some republican economics, i'm a gonna buy me an american car!" nope. life went on same as always. i know a few other folks who were on the benefit end of the tax cuts and they feel about the same. i'm sure that somewhere there was an accountant or book-keeper that came in his pants over it but not me.

    it's the same with the assholes who rage and spew against the "death tax." none of the beneficiaries of that cut would even notice a little more here or there, those motherfuckers are already rich beyond imagination.


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