September 26, 2010

On Tax the Rich

With Reference To: Tax the Rich

No matter what income level you increase taxes from, the act, in itself, will sacrifice some aggregate demand for goods, and some for financial assets like stocks. The key is in using the additional tax collected to generate moderate income jobs -- with way higher marginal propensity (Read: NEED) to consume -- in the social sector that has a deficit of facilities: e.g. Affordable Education. Then you obtain a Net INCREASE in Aggregate Demand.

If we want to cause not the slightest discomfort to ANYONE then it pretty much means no taxes can EVER be increased!! The choice is Between bringing up the socio-economic-physical infrastructure while *net* creating high mptc jobs to add *Net Aggregate Demand* while helping those struggling for employment v/s Dump this agenda in order not to put anyone under any kind of marginal discomfort.

Although, In a fiat currency system, the Govt does not need to take from Peter to give to Paul, the following considerations do apply:

1) As rightly noted in 'Winterspeak' elsewhere, one limitation on Govt in creating new money is that it could create too much of it and wreck intolerable inflation. The improved progressive taxation with the expiration of the tax cuts for the above $ 250 K layers increases the Govt'al free hand in using tax + deficit to pursue the socioeconomic need of the time.

2) Demand Pull Inflation is NOT the only problem around excess money in the system. The money with the top 2% folks has a natural desire for returns, which takes them to stocks, commodities, CDs, bonds et al. When they crowd around commodities, they produce externally inflicted, speculative inflation -- the Oil price boom in 2008 we know was exactly that...and played the proximate cause of the foreclosures and precipitation of this multidimensional crisis.When they crowd around bonds and CDs, interest rates get depressed and the (rightly so) play-safe seniors get badly they can end up with negative real rate of return, while their healthcare keeps going only up. (Obama has come out with a good concept of allowing 100% depreciation in tax calculation if you invest your surplus in Production assets that generate Mainstreet employment, instead of financial assets)

I do empathize with the thought that the points at which tax rates change ought to factor in the cost of living where the assessee resides and works. $250 K means not the same everywhere.

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