An idea for the spend-a-lot tax cutThe biggest boost to an economy is when people are buying lots. This is why 'consumer confidence' is given such great importance in the business pages. If the consumers are confident in their economic situation then they don't feel a need to save lots. Thus they buy things and the economy is good.
So why not make a change to the tax laws as follows: If a person or corporation spends more then X percent of their income for the year then they get some tax refund/reduction. This would encourage more spending and investment which pumps money into the economy, thus growing it. If the goal is to grow the economy (and it is) then this seems like it would definitely help.
And it could be marketed as lowering taxes: a politicians wet dream.
1 comment Macroeconomics 209:
(1) Governments already do this, sort of, giving tax breaks for spending on any number of activities.
Rather than make it X% of your income, they encourage you to spend money on certain industries that are either economically or politically important.
Eg., Spending your income on university education gets you a tax break.
(2) The GDP is made up of consumer spending, yes, but savings can actually improve the economy just as much, or more.
The money that people leave in the bank is recirculated into the economy through bank loans. The theory is that, in the free market system, money will flow to the most profitable use.
The problem is that it may take a while to get there. For instance, there is a time lag between when people start saving, the banks realize that they have lots of money to loan out, they drop interest rates, people take out more loans, and when they start making productive use of the money.
These time lags cause the ups and downs of the economy, aka the "business cycle."
A Keynesian believes that consumer confidence is highest when the bumps and dips of the economy are smoothed out as much as possible by the government, i.e., If there is not enough consumer spending, lower interest rates and use tax policy to encourage spending. If consumers are spending too much, causing inflation and depleting savings, then the government raises taxes and increases interest rates.
Laissez-faire economists believe that this is harmful to the economy, as the government is no good at accurately figuring out what is the most profitable use of capital at any point in time. Therefore, government interference with the economy is unhelpful and wastes money on administration.
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