Saturday, July 06, 2013

A low flat tax is not something to laugh at

governmentnowealth

Flat_TaxSome believe that in order to get enough money to service the country, taxes should be raised. However, that is a sure-fire way to  bring the economy to a halt, since investments will come to a grinding halt and the people will either do their utmost to keep most of their money to themselves, or go look for greener grass elsewhere.

Others believe that government should should stimulate or boost the economy through fiscal or monetary policy. Jasson Urbach writes:

“The simple reason government spending fails to end recessions is because every rand the government “injects” into the economy must first be taxed or borrowed out of it. Government merely redistributes money from the productive to the non-productive sectors of the economy. No new income and, therefore, no new demand for goods and services is created.

It is not government but private firms that generate wealth and are the engines of economic growth. Government cannot create new purchasing power out of thin air. The mistaken view that fiscal stimulus can pull economies out of recession persists because the jobs created through government ‘make-work’ programmes are clearly visible. What we cannot see are the jobs that would have been created elsewhere in the economy with that same money had it not been taxed or borrowed by government.”

He further writes about the limitations of government monetary policy. “At best,” he writes,

“it is simply a lever that can be adjusted to influence growth in the short-run. Consider what happens when the Reserve Bank cuts interest rates beyond what would have occurred if interest rates were freely determined by the interactions between the demand and supply of credit. When interest rates are cut too far, the capital allocation in the economy is skewed because capital is allocated to marginal activities. For example, if real interest rates are negative or zero, it would be unwise to hold cash balances because the investment will not earn a return. In this case investors would look for alternative places to invest. In low interest rate environments, these alternatives might be marginal activities that normally would not attract investment. When interest rates are forced to rise because of increasing inflation, marginal investments are exposed and the economy is likely to relapse into another period of recession.”

He can continue reading Urbach’s article entitled A low flat tax will lead to investment, growth and job.

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