quick question -- tax cuts and prices.

[Tsoman]

Theoretically, if Ron Paul was elected and somehow managed to drastically reduce govt spending and abolish the IRS, this would cause people to have a lot more money on hand because they are not paying as much taxes.

Would the fact that people have more money cause prices to rise in certain areas? Because if people have more money to spend, the demand on certain products will increase.

Forgive my economic ignorance.

PS, I'm not criticizing his plan, just working out details.

 

[beermotor]

Look up the average american household debt. People aren't going to have a whole bunch of extra money to blow, they will pay down the debt they currently just service.

 

[angelatc]

This is why Paul insists that things have to segue in slowly. Another example is that if we booted all the illegals out in a day, wages would skyrocket and the whole country would be a mess.

Good changes happen slowly.

 

[Spatch67]

Theoretically, if Ron Paul was elected and somehow managed to drastically reduce govt spending and abolish the IRS, this would cause people to have a lot more money on hand because they are not paying as much taxes.

Would the fact that people have more money cause prices to rise in certain areas? Because if people have more money to spend, the demand on certain products will increase.

Forgive my economic ignorance.

PS, I'm not criticizing his plan, just working out details.

I am going to take a stab at this, but if any economist wishes to add to this or correct me please do. My knowledge is somewhat limited.

Your theory is partially correct, in that more money will result in higher consumption, which leads to higher prices.

However, you mustn't forget that money and government spending does not exist in a vacuum. The money is out there. When it is spent through taxation it reaches its final destination through different channels. Therefore, if you keep your money that would otherwise be taxed, then you simply take it to the store and spend it on what you want. If the government taxes you, then they pay thier gov employees and beneficiaries with it and they eventually spend it at the store. Thier may be a slight consumer spike in prices in some markets, but not enough to make a lifestyle change.

The real threat of rising prices comes from the money creation by the scam known as the Federal Reserve (which Dr. Paul, God bless him, is trying to eliminate).

Hope this helps!

 

[Tsoman]

I am going to take a stab at this, but if any economist wishes to add to this or correct me please do. My knowledge is somewhat limited.

Your theory is partially correct, in that more money will result in higher consumption, which leads to higher prices.

However, you mustn't forget that money and government spending does not exist in a vacuum. The money is out there. When it is spent through taxation it reaches its final destination through different channels. Therefore, if you keep your money that would otherwise be taxed, then you simply take it to the store and spend it on what you want. If the government taxes you, then they pay thier gov employees and beneficiaries with it and they eventually spend it at the store. Thier may be a slight consumer spike in prices in some markets, but not enough to make a lifestyle change.

The real threat of rising prices comes from the money creation by the scam known as the Federal Reserve (which Dr. Paul, God bless him, is trying to eliminate).

Hope this helps!

Thank you, I was thinking along those lines.

 

[MBA2008]

Prices wouldn't change much

If taxes were reduced, corporations (businesses) would desire to increase supplies to meet the anticipated rising demand. Although there might be a short bump in some prices, they'd come back down pretty quickly as firms increase supply. I doubt there would be a noticeable increase in the price level at all, but if there were, its effects would be very modest and transient.

The other half of this that if firms are directly affected by the tax cuts (that is corporate rates decline as well) , you will see prices decline in high & moderate competition industries (e.g. retail) because firms will have larger margins that normal. In competitive industries, market share is important, and price is the primary dimension upon which these firms compete. Firms will use the extra room in their margins to lower prices to compete for market share.

There are NUMEROUS other positive iterative and incidental effects of tax cuts that I will not attempt to list and explain in this forum. Suffice it to say, across-the-board tax cuts are very good.

 

[Tsoman]

ok that was a very good answer.

I assume you're getting an MBA in 2008, no?

 

[CJLauderdale4]

To me, the only affects that this truly has is the ability for people to reduce debt immediately, and allow private non-government-contracted companies to get more revenue. This is good because much of the money given to contracted companies is wasted, rather than spent to compete in the real market for their revenue. I've worked in both sectors as an engineer, and working for the govt. quickly becomes a corporate welfare program for many. I was there and became one of them for 2 years until I got out and now work in the private sector. I used the system and it was pathetic.

BUT, in order for people to truly be liberated, we all need to work to be fiscally responsible in our own lives with budgeting, debt-control, etc. You know, the stuff THAT WE WEREN'T TAUGHT AS A CHILD IN SCHOOL!

 

[tsoldrin]

It will balance out in short order... a good example is computers. When I first got into computers in the mid 80's... I remember buying one (an Amiga) for around $2000 the monitor alone was $500. (a modem was another $200) I have an old computer shopper with 486's listed in the $2000-$3000 range from a little bit later too... these days, $2000 could buy you a great computer (and modems come with or run about $20... but really, you can build your own very decent system for about $300 bucks.

The price reduction is due to streamlining of the entire process right through manufacturing to assembly to retail to the end user. And that's due to demand.

If folks had plenty of extra cash on hand, the stuff they're likely to purchase are things that are already streamlined... flat screen tv's and gadets and whatnot... so if there was any spike at all it would be short lived... and in a short period the result would be to create more jobs to feed the demand, which in turn would put more money into more consumer's hands to continue the crazy cycle...

 

[Highmesa]

Dr. Paul is going to have to walk a very fine line here, but in my mind, there is no one else who could come close to pulling it off. He will also come to DC with a bevy of Austrian Economists.

There is a corresponing problem that will occur because he wants to ditch the Federal Reserve Board. If you want to scare yourself, watch the movie The Money Masters that is posted at ronpaulaudio. The FRB is going to kick and scream the whole way, and try to undermine him. Money, at least as supplied by the fed, will become extremely tight, and people will likely be forced to use tax relief to pay off their debts rather than for additional consumption.

This creates an additional problem as debt = money. As people pay off debts, the money supply contracts further. The bulk of these debts are being held by FRB member banks. They will want them paid, and they will not be issuing new debt (money), but rather siezing assets as fast as they can under foreclosure.

Purely a guess here, but Dr. Paul will likely have to go to a system similar to what Lincoln did during the civil war and issue greenbacks - government (not FRB) issued fiat notes. If he doesn't prop up the money supply to replace the FRB, there would be another depression.

This is why you don't hear him talk about an immediate return to a fully backed gold standard - that would be disasterous. But allowing competition for currencies, like digital commodity back currencies would gradually weaken the central bankers control over the world. Currency is like anything else in this regard, competition=good, monopoly=bad.

That said, this HAS to be done, and the sooner the better. The piper has to be paid at some point, and you better damn well trust the person doing it. I trust Dr. Paul. Can't say that for any of the other candidates R or D.

 

[MBA2008]

Tsoman wrote:

"I assume you're getting an MBA in 2008, no?"

Yes, that's correct.