article: Millionnaires Go Missing

[dewton]

Quote from Sandybestdog:


It�s a simple question. If taxes go down, how can revenues go up ...

I will offer a possible theory/highly simplified explanation of my own on how/why this might be.

Suppose the government cuts taxes, saving one worker $3,000 per year in income taxes. The worker places this extra money in his bank account. The $3,000 is then used as bank reserves, and at a bank lending rate (ie. leverage) of 10:1, the bank lends $30,000 into the economy. This $30,000 is then used towards new jobs that have an income tax of, say, 20%. This is $6,000 in revenue due to the $3,000 tax cut, or extra tax revenue of $3,000.

 

[gucci]

Quote from Sandybestdog:

Typical ET response. Someone asks a simple question and everybody writes it off and comes up with some crappy response that tries to delegitimize the question based on who’s asking it.

It’s a simple question. If taxes go down, how can revenues go up if the money supply stays the same?

Reagan cut taxes, revenues went up. But there was this little thing called massive inflation throughout the 80’s that sort of helped that theory. Clinton raised taxes, but yet the economy in the 90’s was very good. It seems all the tech millionaires weren’t deterred from working by higher taxes. Then Bush cut taxes and the economy goes in the crapper and now less revenue is being created. Bush also tried to pump the money supply, but it’s not working. So I don’t see the correlation? I’m sure however that you will write this off as some idiot not knowing what he’s talking about instead of just explaining how revenues can go up when taxes are cut if the money supply does not increase. Please, I’m all ears.

This may be of interest if it has not been already posted.http://en.wikipedia.org/wiki/Laffer_curve

Edit: I just thumbed through the article and found out, that the shadow economy wasn't mentioned there though.

 

[Unhommefou]

Quote from Sandybestdog:

Typical ET response. Someone asks a simple question and everybody writes it off and comes up with some crappy response that tries to delegitimize the question based on who’s asking it.

It’s a simple question. If taxes go down, how can revenues go up if the money supply stays the same?

Reagan cut taxes, revenues went up. But there was this little thing called massive inflation throughout the 80’s that sort of helped that theory. Clinton raised taxes, but yet the economy in the 90’s was very good. It seems all the tech millionaires weren’t deterred from working by higher taxes. Then Bush cut taxes and the economy goes in the crapper and now less revenue is being created. Bush also tried to pump the money supply, but it’s not working. So I don’t see the correlation? I’m sure however that you will write this off as some idiot not knowing what he’s talking about instead of just explaining how revenues can go up when taxes are cut if the money supply does not increase. Please, I’m all ears.

http://en.wikipedia.org/wiki/Federal_funds_rate#Historical_rates

Money as Debt:
http://video.google.com/videoplay?docid=5352106773770802849



Really, Really, easy version:

Lower rates, eventually means lower interest rate that banks charge to each other, and businesses.

Money helps business do more R&D and pay for better factories, thereby more inflows of cash to be taxed.

But dropping rate makes holder of US bonds and such very scared. So, as hedge, by other currencies (yes, I know that there is a shit load to it than this, but I am making this very, very easy) and also invest in commodities as a hedge, causing prices to go up. Inflation, YAY!

Value of dollar drops.

Reserve goes , "Oh shit, san!" and begins to raise rate to protect dollar.

Raising fund rate causes banks, whom borrow money from the Federal Reserve to raise their rates on that of the business and people that borrow, cause they have got to make up the spread.

Businesses, STATES and people who over-extended themselves go bust. Too many eventually go bust, and CRASH (or are supposed to).

Lobbyist for businesses complain. People complain. Unemployment goes up. Congress and President go, "Oh shit, san!"

So, Reserve, to placate the masses, drops rates.

Businesses go YaY! Jobs go up...sort of.

Businesses, and Hedge Funds, to protect themselves, then hedge by investing in commodities and currencies.

Cycle repeats.

Now, to steer this thread almost completely off topic:

Extra credit, under which president did the federal funds rate plunge the furthest?

 

[dewton]

Quote from Unhommefou:

http://en.wikipedia.org/wiki/Federal_funds_rate#Historical_rates

Money as Debt:
http://video.google.com/videoplay?docid=5352106773770802849



Really, Really, easy version:

Lower rates, eventually means lower interest rate that banks charge to each other, and businesses.

Money helps business do more R&D and pay for better factories, thereby more inflows of cash to be taxed.

But dropping rate makes holder of US bonds and such very scared. So, as hedge, by other currencies (yes, I know that there is a shit load to it than this, but I am making this very, very easy) and also invest in commodities as a hedge, causing prices to go up. Inflation, YAY!

Value of dollar drops.

Reserve goes , "Oh shit, san!" and begins to raise rate to protect dollar.

Raising fund rate causes banks, whom borrow money from the Federal Reserve to raise their rates on that of the business and people that borrow, cause they have got to make up the spread.

Businesses, STATES and people who over-extended themselves go bust. Too many eventually go bust, and CRASH (or are supposed to).

Lobbyist for businesses complain. People complain. Unemployment goes up. Congress and President go, "Oh shit, san!"

So, Reserve, to placate the masses, drops rates.

Businesses go YaY! Jobs go up...sort of.

Businesses, and Hedge Funds, to protect themselves, then hedge by investing in commodities and currencies.

Cycle repeats.

Now, to steer this thread almost completely off topic:

Extra credit, under which president did the federal funds rate plunge the furthest?

The cycle doesn't repeat indefinitely though. At each cycle, the amount of total debt increases by some mind boggling amount. Of course, all debt comes with an interest rate. At some point, the interest paid on debt becomes a certain critical % of GDP, at which point all cycles come to an end and it's the end of modern society as we know it.

 

[Scataphagos]

Quote from Unhommefou:



Extra credit, under which president did the federal funds rate plunge the furthest?

Reagan?

 

[ivanbaj]

Why would one pay higher taxes in one place if he can pay less taxes in another?

1. Lower crime
2. Better schools
3. Better streets, parks etc...
4. Better weather
5. From his good hart to help the less fortunate
6. To help the local government
7. Regional pride (ethnic, national etc...)
8. He is too dumb to know that he can pay less in another place
9. Capable work force is not available in the other place
etc....

I don't believe 5,6 and 8 the rest are good reasons. There might be more good reasons.

What happens when 1,2,3 and 9 go away? If the government does not spend the money to improve on the above points why would we want to pay higher taxes?

 

[Sandybestdog]

Quote from dewton:

I will offer a possible theory/highly simplified explanation of my own on how/why this might be.

Suppose the government cuts taxes, saving one worker $3,000 per year in income taxes. The worker places this extra money in his bank account. The $3,000 is then used as bank reserves, and at a bank lending rate (ie. leverage) of 10:1, the bank lends $30,000 into the economy. This $30,000 is then used towards new jobs that have an income tax of, say, 20%. This is $6,000 in revenue due to the $3,000 tax cut, or extra tax revenue of $3,000.

Um Sorry but you cut me off. I said how can revenues go up if taxes go down without the money supply being increased? You just gave an example of taxes going up because of the money supply going up (inflation). That is correct, that can happen, but you didn’t create a new job and thus more tax revenue, you stole 1 cent from 3,000,000 low and middle class Americans and gave it to the guy getting the new job. It’s not the new guy making 30k that’s paying more taxes, it’s the 3 million Americans that have to pay $1.01 for their double cheeseburger instead of $1. That doesn’t accomplish anything.

 

[Sandybestdog]

Quote from gucci:

This may be of interest if it has not been already posted.http://en.wikipedia.org/wiki/Laffer_curve

Edit: I just thumbed through the article and found out, that the shadow economy wasn't mentioned there though.

Well thumbing through the article it seems that there is no conclusive evidence that lower taxes actually increases revenues without the money supply being increased. From what I see, the Cato institute seems to think we should run the economy based on all these free market ideas coming out of a textbook that don’t really hold up in the real world. Just my opinion. Like supply side economics. Why is making the rich richer and then having that money “trickle” down to the little guy gonna be better than making the little guy a little less little and thereby having the masses create the demand from which a few people capitalize on and become rich?

 

[Mercor]

Quote from Sandybestdog:

Um Sorry but you cut me off. I said how can revenues go up if taxes go down without the money supply being increased?

The reason that lower taxes cause higher revenue is because lower taxes lead to supply side growth. If you give one penny to 3 million people it only creates demand. Demand by itself creates inflation. You must increase production first this will lower prices to create demand.

You are trying to remove money supply from the equation. Only in a zero sum game will taxes have no effect.
Tax cuts work because it increases the money supply.

 

[dewton]

Quote from Sandybestdog:

Um Sorry but you cut me off. I said how can revenues go up if taxes go down without the money supply being increased? You just gave an example of taxes going up because of the money supply going up (inflation). That is correct, that can happen, but you didn�t create a new job and thus more tax revenue, you stole 1 cent from 3,000,000 low and middle class Americans and gave it to the guy getting the new job. It�s not the new guy making 30k that�s paying more taxes, it�s the 3 million Americans that have to pay $1.01 for their double cheeseburger instead of $1. That doesn�t accomplish anything.

no... suppose there's only 1 product in the entire economy. the new guy getting a job helps produce more for the economy, which increases supply, and lowers prices, thus the $1.01 cheeseburger drops in price to $1.00. ideally of course.