16-12-2003 12:31									#91
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Kid, a "supply-side" tax cut would have two components, a first components directed to the lower and middle class and a second "supply-side" component directed to the wealthy whose tax rates are lowered. Surely the first components of any such tax cut would result in an immediate and sustained increase in private spending. The second component, as you say, will be partially if not completely absorbed in buying new treasury notes to finance the short-term deficit. As there is excess capacity in the system typically when taxes are cut, increased spending by the lower and middle class will lead to higher production without inflation. This should increase tax revenue to partially offset the need to sell treasuries. Because inflation is not rising, interest rates will remain constant even though there is a significant increase the supply of treasury notes.

Not all the new treasuries will be purchased by Americans. A great deal will be purchased by foreigners. This would allowing a significant portion of the tax decrease to be spent by the rich on new luxury items including new homes, etc. etc. etc., and new investments, also helping the economy.

But the most important aspect of tax rate cuts to the rich is the behavior modification the lower rates adduce. The rich will be less inclined to place their money in low return investments such as treasury notes and more inclined to put their money into high return (but risky) business investments, thus helping to create new jobs and new wealth the country.

	16-12-2003 16:17									#92
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Ned, been gone a couple of days. Point though about the supply-side growth. Your last post has two assumptions that put the base line assumptions at risk.

As I alluded to in one of my post in the last couple of weeks on some thread, US bonds may stop being considered a good investment. Due to weakening of the dollar, which is inevitable given our import glut, and the current economic strength of the EU and the euro, plus our massive dependence on foreign oil, there are better investments. The only countries with any substantial interest in purchasing US bonds are China and Japan, as this keeps their currencies artificially low compared to the dollar, letting the import glut continue.

Secondly, in the world economy the wealthy don't have to wait for US supply-side cuts. They already are investing in foreign markets with much better returns. If China especially, and India concerning property rights (both corporate and intellectual) reformed their laws, you could expect to see investment in the US really tank. Right now it's only suffering.

Even with supply-side cuts, you are going to see alot of high risk money go overseas, and you'll start to see conservative investment money go into the Euro or global corporations that are run well.

I'd like to see somebody apply the supply-side mantra in the global marketplace. I'll bet it means the stagnating or actual loss of income (including health care) suffered by blue and white collar workers in the US is offset by even bigger gains overseas. That appears to be happening. The problem is that I am one of those US workers.

	16-12-2003 21:31									#93
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quote: Originally posted by Ned Kid, a "supply-side" tax cut would have two components, a first components directed to the lower and middle class and a second "supply-side" component directed to the wealthy whose tax rates are lowered.

Real tax cuts sometimes have two components. My point is that tax cuts should be aimed at increasing consumption, not savings.

quote: Originally posted by Ned Surely the first components of any such tax cut would result in an immediate and sustained increase in private spending. The second component, as you say, will be partially if not completely absorbed in buying new treasury notes to finance the short-term deficit. As there is excess capacity in the system typically when taxes are cut, increased spending by the lower and middle class will lead to higher production without inflation. This should increase tax revenue to partially offset the need to sell treasuries. Because inflation is not rising, interest rates will remain constant even though there is a significant increase the supply of treasury notes.

Inflation isn't the only factor of interest rates. The supply and demand for money are also factors. The purchase of bonds creates a demand for money equal to the tax cut. Only in the case where all of the tax cut is saved will interest rates remain unchanged (all other factors remaining unchanged). The more of the money that is spent the higher interest rates will increase.

If inflation becomes a factor taxes are suppose to be raised again, according to Keynesian theory. That means the recession is over. Keynes didn't deal with the case of stagflation.

quote: Originally posted by Ned Not all the new treasuries will be purchased by Americans. A great deal will be purchased by foreigners. This would allowing a significant portion of the tax decrease to be spent by the rich on new luxury items including new homes, etc. etc. etc., and new investments, also helping the economy.

Rich people do save money, but politicians who propose tax cuts always argue that they will boost savings and therefore increase investment. That simply isn't true. It's the increase in consumption that boosts investment.

quote: Originally posted by Ned But the most important aspect of tax rate cuts to the rich is the behavior modification the lower rates adduce. The rich will be less inclined to place their money in low return investments such as treasury notes and more inclined to put their money into high return (but risky) business investments, thus helping to create new jobs and new wealth the country.

I propose a single wealth tax. Taxes on specific types of income distort the market.