Tax cuts

• Lan wrote on 2010-12-14 03:09
  Can someone please enlighten me on why SOME PEOPLE seem to think that these will boost the economy? In theory if you cut taxes then people will have more money, with more money in their pockets people will spend more and thus the economy will get better. A theory however is only a theory unless it's proven, rarely does the aforementioned situation occur as people are more apt to save their money.
  
  So why do people think tax cuts will help? (Unless I answered my own question...)
• BobYoMeowMeow wrote on 2010-12-14 03:27
  Pretty much answered your own question
• Zid wrote on 2010-12-14 03:43
  I think you got the gist of it. Tax cuts = less money the citizens are asked to give up, thus having more money in their pockets.
  
  Does it help the economy or projects that are actually important? It can go both ways, as far as I've seen history.
• Arsik wrote on 2010-12-14 03:45
  It not only gives just the populace more money in their pockets, but more importantly, it gives more money in business owner's pockets. Since those business owners have more money in their pockets, they are more willing to hire more people, meaning more jobs. Since more people will have jobs as a result of this, it boosts the economy a lot more than just giving the populace more money in their pockets.
• Lan wrote on 2010-12-14 03:47

  Quote from Cruril;247343:

  It not only gives just the populace more money in their pockets, but more importantly, it gives more money in business owner's pockets. Since those business owners have more money in their pockets, they are more willing to hire more people, meaning more jobs. Since more people will have jobs as a result of this, it boosts the economy a lot more than just giving the populace more money in their pockets.

  
  
  Hmm but since taxes pay for schooling, doesn't that mean that tax cuts will eventually lower the competency of workers making employers hesitant to hire people?
• Arsik wrote on 2010-12-14 03:55
  Not necessarily. While yes, less taxes means less money going to the government, but the government is able to adjust their budget accordingly. For example, now that we're pulled out of Iraq and thinking about pulling out of Afghanistan and Pakistan, the government can focus the money that they're saving on the military for education.
  
  Of course, you can also think about it this way: If more people have jobs, even with the tax cuts, there's still more money coming into the government compared to the government not only paying back to the less fortunate with tax returns, but also welfare for those that don't have jobs. So tax cuts can be seen as win-win. I honestly think that the reason that the democrats aren't going for it is because it has the words "Bush Era" in it. >>
• Cucurbita wrote on 2010-12-14 03:58
  Its a short term fix to the economy.
  However the economy has already been fixed from what the numbers suggest. The only thing we need now are more jobs, and I don't know if a tax cut is the right way to do it.
  
  In any case, I prefer not to advocate this as it hurts the economy again in the long run. Well, its okay now, but we definitely need to stop after the 2 years its extended for.
  
  Not to mention, if you look into the historical pattern of the economy every time there is a tax cut, you would notice that a recession follows very soon after QQ
• gentrone wrote on 2010-12-14 14:09
  From an Economist point of view (this is just my second year), taxes will most of the time negatively affect society in a 'free' market. Why? Because they directly affect production (Quantity) and Price. Every time a company is taxed, it will reduce the amount of goods produced and make the price higher to 'cover' the loss tax generates. This loss from both the consumer (less possibility of buying stuff) and the producer (less production) is often called 'dead weight loss' or 'allocative inefficiency'. Let me use an example:
  
  

  [Image: http://d.imagehost.org/0090/tax.png]

  
  
  Under normal circumstances, the optimal price of an MP3 player would be $200, and the amount produced 5k, for both producers and consumers be 'okay'. (For the moment ignore the 'S+Tax' line)
  
  

  
  
  • Consumer surplus is the amount of money consumers are 'willing' to pay but don't because the Pareto Optimal (optimal point) intercepts with $200. The maximum amount of money they would pay is $260, therefore they have a 'gain' of $60.
    
    
    
  • Producer surplus is related to marginal cost of producing one unit of any good. $150 is the cost of producing 1 MP3, that's where, for the producer, the supply curve begins. Because from there they can charge X more dollars and have profit. In Economic Theory, you can have a profit even when your marginal cost (cost) equals marginal benefit (price). Therefore, any additional dollar charged would mean a surplus for the producer.
    

  
  
  But, what happens when government taxes a market (look now at the S+Tax curve)? First, supply contracts (moves to the left). The price definitely rises to the previous one+tax while the amount produced is reduced as well. Now, both the consumer surplus and producer surplus are negatively affected. New price is 210, while the amount produced is 4k MP3 players.
  
  As you can see, that little triangle is what society loses overall. That is what tax does. Therefore, cutting taxes, among other things, will benefit society in general. Please keep in mind this an over-simplified economic model, and does not consider any other factors (ceteris paribus). But that's necessary to understand what's going on. Hope this helps.
• wolfram wrote on 2010-12-14 17:51

  Quote from Lan;247289:

  Can someone please enlighten me on why SOME PEOPLE seem to think that these will boost the economy? In theory if you cut taxes then people will have more money, with more money in their pockets people will spend more and thus the economy will get better. A theory however is only a theory unless it's proven, rarely does the aforementioned situation occur as people are more apt to save their money.
  
  So why do people think tax cuts will help? (Unless I answered my own question...)

  
  
  Historically, people aren't apt to save money. In the last 30 years, except for 1 year, of the United States history, Americans have always spent more then they saved. Our Economy actually depends on this principal of spending more then one saves since that gets money changing hands, i.e stimulating the economy.
  
  All economic models are just theoretical construct based on a set of variables with a quantitative relationship between them. In easier to read terms, all economical models are theories to illustrate something too complicated in real life to actually be explained over time to a tee. No model is perfect, so we have several of them.
• Cucurbita wrote on 2010-12-14 18:26
  See, now we get criticisms and support that all sound logical no matter how you look at it.
  
  This is why stuff like tax cuts are such a difficult issue. Because of the chaotic nature of how the world works, there are too many "theoretical results" and no guarantee of any of them.