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Monday message board

December 17th, 2007

It’s Monday again. Post on any topic. Civilised discussion and no coarse language please. If in doubt, read the discussion policy.

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  1. Fozzy
    December 17th, 2007 at 12:03 | #1

    Access Economics have released a report today saying that we shouldn’t get the tax cuts promised during the elections.

    (Peter Martin summarises it pretty well here: http://petermartin.blogspot.com/2007/12/rivets-are-popping.html
    – love the title: Rivets are Popping!)

    It seems it’s the politics of going back on promised tax cuts that is stopping Swan from canceling the tax cuts. I wonder if enough momentum could be generated to convince the public and thus Swan, that the tax cuts should not be introduced (or maybe delayed until inflation is under control)

  2. Ikonoclast
    December 17th, 2007 at 12:52 | #2

    I think as a country and a people we should forego the tax cuts which will just be used for another consumer spending orgy. Instead we need to invest in new infrastructure right across the board.

  3. December 17th, 2007 at 12:58 | #3

    Ikonoclast, a lot of people seem to have agreed with you, there were lots of people writing to the Letter to the Editor saying that very thing in the leadup to the election. I feel that way myself. I don’t think the “denial” of tax cuts will be a disaster if handled properly.

  4. December 17th, 2007 at 12:59 | #4

    if they don’t carry out promised policies, what is the point of voting?

    [insert usual diatribe against parliamentary oligarchy here]

    [insert usual paean to democracy here]

    .. and in closing, citizen initiative cures most of the problems of corruption and inefficiency inherent in non-democratic societies.

  5. 2 tanners
    December 17th, 2007 at 13:48 | #5

    al loomis

    1. You vote so that the general thrust of most of the policies that you thought important might not be as badly compromised as if the other side got in.

    2. Deem diatribe read. Brevity appreciated.

    3. Deam paean read. Brevity likewise appreciated.

    4. See 1. Citizen initiative cures nothing, the same people who will vote for idiots will vote like idiots. You can still only hope for least worst.

  6. Andrew
    December 17th, 2007 at 14:26 | #6

    L.A.W. tax cuts

  7. Ian Gould
    December 17th, 2007 at 14:54 | #7

    “.. and in closing, citizen initiative cures most of the problems of corruption and inefficiency inherent in non-democratic societies.”

    Right, that’s why the US system is so much more efficient and less corrupt than Australia’s.

  8. Alphonse
    December 17th, 2007 at 15:10 | #8

    Mr Rudd can say that Mr Howard was too good an economic manager for his electoral campaign launch tax cut promises to be other than (wink) non-core promises. Mr Rudd can add that he also is too good an economic manager for his promised tax cuts, made electorally necessary by his opponent and the cross-eyed horse race callers in the media, also not to be core promises.

  9. December 17th, 2007 at 15:16 | #9

    Rudd really will be a “me-too”? Adopting non-core promises also?

    Perhaps he is in the wrong party?

  10. Ernestine Gross
    December 17th, 2007 at 15:29 | #10

    And back to the financial markets:

    ASX down by about 3.4%

    Centro in a spot of trouble due to high leverage involving substantial short term credit. The technical term is ‘financial distress’.

  11. Ian Gould
    December 17th, 2007 at 16:18 | #11

    The current problem we have is that demand is exceeding the capacity of the economy to increase output resulting in higher inflation.

    Public infrastructure spending will add to final demand in much the same way as will tax cuts.

    Personally, I have a fairly strong view that governments should stick to their promises so I can’t fault the government for goign ahead with tax cuts unless there’s some as yet unforeseeable economic catastrophe.

    The real solution though lies not in trying to artificially restrain demand but in increasing the capacity of the economy to meet that demand.

    Increased education and training expenditure should, in the longer term, ease demand constraints in the labor market.

    The Howard government removed a lot of the old constraints on output – which leaves relatively little the Rudd government can do in the short term.

    Cutting tariffs is one way to fight inflation and increase supply and Rudd could send a positive sign to the markets by eliminating a bunch of the 5% nuisance tariffs.

  12. December 17th, 2007 at 16:27 | #12

    ian g, there is no citizen initiative in the usa federal government, that’s why they’re as screwed up as oz, plus christian fundamentalism, multiplied by psychopathic corporation culture.

  13. Ikonoclast
    December 17th, 2007 at 17:56 | #13

    There are number of issues with higher inflation in our current environment. Assets inflation (particularly house prices) has been pushed by over-lending; too much easy credit. Goods inflation has also been pushed by too much credit on the plastic cards. The government could tighten credit rules and then the Reserve wouldn’t have to use interest rate rises so much.

    Inflation of house prices has also been driven by massive rises in tradesmen’s incomes. But since they are mostly self-employed it hasn’t been called a “wages breakout” yet essentially that is what it is.

    Of course, there is much hypocrisy in our system where any good wage rises are called a “breakout” but record share profits and rents aren’t called a “profits breakout” and a “rentiers’ breakout”. See it’s all in the language, all in the definitions, all in who controls the discourse.

    Adam Smith stated in “The Wealth of Nations” that profit rises were in fact more inflationary than wage rises. I don’t hear any neocon economists quoting that bit of Adam Smith.

    There’s one heck of a lot of bulldust in modern right wing economics and the whole insidious intent of the argument is all about vastly enriching the top 10% at the expense of the other 90%.

  14. swio
    December 17th, 2007 at 18:54 | #14

    They should never have matched the tax cuts. Rudd was determined not to be wedged all throughout the election campaign and ended up wedging himself in government by copying a bad policy. The current Labor government is going to find its entire first 3 years stuck between those tax cuts and the inflation/interest rate pressures. No doubt this is exactly what Howard and particularly Costello intended when they released the policy.

    There is one possible way out of this mess. They could, in effect, nullify the tax cuts by accelerating plans to reduce Australia’s carbon emmissions. Reducing the number of carbon permits available would force the use of the “safety valve” built into the proposed carbon trading scheme. This safety valve is bascially a carbon tax. The net result would be to replace the income tax cuts with a carbon tax. Or they could use some other method. Any way you do it reducing carbon emissions more quickly will should offset the tax cuts and reduce pressures on interest rates.

    Could controlling carbon emmissions become a substitute/supplement to monetary policy for controlling the speed of the economy?

  15. December 17th, 2007 at 19:10 | #15

    What tax cuts? We will still be paying more in real per capita terms. Increasing the price of government is a stupid way to keep prices under control. Especially given that government is a major household expense. The price of government is one price that the government should put some controls on.

  16. Tony G
    December 18th, 2007 at 01:15 | #16

    Ikonoclast said 13#
    “There’s one heck of a lot of bulldust in modern right wing economics ”

    Correction it should read;
    There’s one heck of a lot of bulldust in modern economics

    Terje’s assertion “What tax cuts? We will still be paying more in real per capita terms” is correct.

    TAXES CLASSIFICATION

    5 A tax is a compulsory levy imposed by the government, mainly to raise revenue. There is usually no clear and direct link between the payment of taxes and the provision of particular goods and services by government. Taxes are levied, inter alia, on income, wealth, production, sale and/or use of goods and services and the performance of activities.

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5506.0Explanatory%20Notes12005-06?OpenDocument

    And more bulldust in modern economics here;

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/F547C4578B467E25CA2571BB0080D9C2?opendocument

    Government Taxation revenues as a proportion of GDP have been rising in real terms, yet services provided by the public sector is reducing substantially.

    Due to privatisation, many public sector services are now provided by the private sector;
    Welfare pensions into private super; public to private healthcare; public utilities into private utilities; flow from public into private education; public roads into private toll roads; private hospitals; privatising public transport, etc etc.

    Privatisation is disguising and camouflaging the real increase in taxation.

    Privatisations are a scam where the government maintains its revenues whilst abolishing its services.The consumer has to pay twice; Once to the corporation and again to the government who no longer provides the service.

    Consume; be silent; die!

  17. December 18th, 2007 at 08:04 | #17

    I don’t know why we hide tax increases by comparing per capita tax revenue to per capita GDP. We don’t measure the price of bread or milk relative to per capita GDP. The only adjustment we make when we look at bread and milk prices is inflation. We don’t demand higher bread and milk prices simply because GDP per capita has gone up.

    Governments should work to a budget. Any increase in that budget above and beyond inflation and population growth should require significant debate and justification. The price of government should not go up on autopilot.

  18. gerard
    December 18th, 2007 at 12:08 | #18

    It has been an extraordinary week for the TORTURE debate in the United States. I know that even the wingnuts have given up on defending B*sh, not difficult to see why. They’ve as much as come out admitting that illegal torture is a part of official policy. Of course the Democrats (has there ever been a more useless and pathetic “opposition” party in history?) are equally culpable, having approved the nomination of Mukasey after he refused to characterise waterboarding as torture, despite the fact that it has been regarded as such in the English/US legal tradition for centuries.

    A former CIA torturer (“interrogator”) John Kiriakou, described the process. As summarized by Scott Horton of Harpers:

    When we want to torture someone (and it is torture he said, no one involved with these techniques would ever think anything different), we have to write it up. The team leader of the torture team proposes what torture techniques will be used and when. He sends it to the Deputy Chief of Operations at the CIA. And there it is reviewed by the hierarchy of the Company. Then the proposal is passed to the Justice Department to be reviewed, blessed, and it is passed to the National Security Council in the White House, to be reviewed and approved. The NSC is chaired, of course, by George W. Bush, whose personal authority is invoked for each and every instance of torture authorized. And, according to Kiriakou as well as others, Bush’s answer is never “no.� He has never found a case where he didn’t find torture was appropriate. Here’s a key piece of the Kiriakou statement:
    LAUER: Was the White House involved in that decision?
    KIRIAKOU: Absolutely, this isn’t something done willy nilly. It’s not something that an agency officer just wakes up in the morning and decides he’s going to carry out an enhanced technique on a prisoner. This was a policy made at the White House, with concurrence from the National Security Council and Justice Department.

    So the members of the National Security Council, B*sh, Cheney, Rice, are guilty of criminal acts (gosh, what’s new?), which have been blessed by the Justice Department of the USA. They can break the law with total impunity, as they did in violating the FISA act, and the A.G. is in on it up to his eyeballs. They have stacked the courts with political loyalists, and are gearing up to do the same with the JAG corps, who are the only people left standing up to institutionalized torture (did I mention that the Democrats make me sick?)

    The Bush Administration is pushing to take control of the promotions of military lawyers, escalating a conflict over the independence of uniformed attorneys who have repeatedly raised objections to the White House’s policies toward prisoners in the war on terrorism. The administration has proposed a regulation requiring “coordination� with politically appointed Pentagon lawyers before any member of the Judge Advocate General corps—the military’s 4,000-member uniformed legal force—can be promoted.

    Now, when the Justice Department itself becomes a criminal operation, where can Americans turn for justice? Revolution? Coup d’etat? This Department of INjustice has announced an “initial probe� into the destruction of CIA torture videos that were demanded by a federal judge, obviously a bare-faced obstruction of justice, clear as day! Why on earth do they need an “initial probe�? And when the person in charge of the probe is himself a pro-torture Republican stooge, there is nothing left to be said about the American justice system except that it is an utter abomination (as are all of the Rightwingers, particularly the pathetic Australian ones, who defend Guantanamo Bay and the international secret prison network and extraordinary rendition program).
    Now this is the same Justice Department that went about trying to dismiss any attorneys involved in the Civil Rights division who were not supportive of efforts to disenfranchise minority voters. Gonzalez walked for this outrage, but Mukasey promises more of the same! By the way – did anyone notice that the toxic piece of sludge Karl Rove has just been charged with contempt of Congress for just ignoring a subpoena to supply documents regarding the attorney firings scandal? Including e-mails that, as David Iglesias (fired US attorney for New Mexico) reveal his master plan to disenfranchise Hispanic voters. This is on top of myriad other crimes, notably the political prosecution of Alabama’s Democratic governor Seigelman. Of course, he’s comfortable knowing he can violate the Hatch Act at will, he has a get-out-of-jail free card with a flick of B*sh’s pen. Hillary and Obama aren’t going to follow this up, they are jellyfish like the rest of the Democrats and will continue the proud Democratic tradition of bending over and taking it every which way from the shamelessly criminal mafia that is the GOP. When it is revealed that they have been illegally wiretapping for years, instead of prosecuting, the Democrats roll over and pass a law to make it legal! How utterly outrageous that Pelosi declares impeachment off the table, when there has never been a President in history who has committed so many high crimes and misdemeanors, right out in the open! At any rate, B*sh’s last days in office will be a veritable pardonathon, and the full truth about torture, wiretapping and electoral fraud will never be brought to light. What more can be said, but that the Bastille (D.O.J. and White House) must be stormed and the monsters inside dragged off to be publicly guillotined, but not before we tie them to a board, stick funnels in their mouth and give them a taste of simulated drowning – since, as they say, it’s not torture!

  19. gerard
  20. jimbirch
    December 18th, 2007 at 12:17 | #20

    I’d like to see Rudd get the RBA to set tax rates – direct and indirect – and tune them periodically, a la interest rates. The government could have some input on how progressive income tax is, and maybe the mix of different revenue systems: income tax, company tax, GST and indirect taxes.

    This would eliminate the usual judgement of the merits of the complex economic policies by the economically illiterate and allow the political process take on more appropriate issues like whether lesbians should be allowed to use IVF services.

  21. Ken Miles
    December 18th, 2007 at 12:32 | #21

    Barry Maley of the CIS has written an extremely poor article for The Australian.

    I added the following the comment to their website:

    It is difficult to correct all of the errors in this pseudoscientific piece but I’ll have a bit of a go.

    * The effect of carbon dioxide increases (not decreases) logarithmically with respect to concentration.

    * This has been known for over one hundred years and was known to climate scientists before Fred Hoyle and Richard Lindzen were born. The IPCC did not accept it later on.

    * Global temperatures have not fallen since 1998. Rather Barry Maley cannot calculate a trend.

    * Stephen Schwartz’s research has been found to be incorrect.

    * Temperature records show a good correlation to known climate forcing agents (primarily greenhouse gases, volcanic and anthropogenic aerosols and changes in solar variability).

    * The statement “two of its key predictions have proved false” is simply wrong.

    * Predictions made by climate models have been validated.

    * The lag between carbon dioxide and temperature in ice cores is expect and was predicted before the length of the lag was determined experimentally.

    This (along with many other) articles simply confirms my suspicion that global warming sceptics are scientifically on par with young earth creationists.

  22. December 18th, 2007 at 14:27 | #22

    This video about the position that GWB ran on in 2000 is funny and yet also very tragic:-

    http://au.youtube.com/watch?v=_MpTNdcM_e0

  23. John Greenfield
    December 18th, 2007 at 14:34 | #23

    I think Rudd should be upfront and present a strong case for NO tax cuts. If he doesn’t persuade the people, he absolutely must follow the public will. Pissing people offf so early would be a disaster.

  24. December 18th, 2007 at 14:58 | #24

    I thought he was up front and said he would give tax cuts. He then took that message to an election. It is a bit rich to now say that he should test the will of the people and make the case for NO tax cuts.

  25. Ian Gould
    December 18th, 2007 at 16:38 | #25

    Terje, if Rudd now came out and didn’t simply toss off a quip about “non-core promises” but made the case that he had misjudged the economic outlook before the election it wouldn’t bother me that much.

  26. December 18th, 2007 at 16:57 | #26

    If Rudd was opposed to tax cuts then we would have had one party running on a platform of tax cuts and another running on a platform of no tax cuts. The people would then have had a clear choice. Changing policy immediately after an election would seem quite dishonest.

    Howard gave us a GST after promising he wouldn’t but at least he provided the voters a chance to decide the fate of him and the GST. He put his changed position to the people.

    And what economic misjudgement are you on about? They are racking in revenue by the bucket load. Not cutting taxes would be rude.

  27. Ian Gould
    December 18th, 2007 at 17:24 | #27

    Tax cuts will stimulate the economy further and make it more likely that the Reserve Bank will need to raise interest rates.

    Ask Centro shareholders what they think of that idea.

    Currently, I’d only support tax cuts if they were accompanied by offsetting spending cuts to limit the impact on aggregate demand.

    Personally, I’d prefer it if Rudd indexed the tax thresholds to prevent real tax rates rising over time and taking away the capacity of governments to offer “tax cuts” which merely hand back the impact of bracket creep.

  28. observa
    December 18th, 2007 at 17:54 | #28

    We all knew the result before it even began but the sleazebags couldn’t resist slimey weasel words to play to the gallery when they announced the inevitable http://www.news.com.au/business/story/0,23636,22942381-31037,00.html

  29. observa
    December 18th, 2007 at 18:12 | #29

    Now tell me that isn’t a bunch of taxeaters building empires, given the Govt’s reflexive, yet pre-ordained response at the end of it all. And this is the Govt that said it would find $10bill worth of savings over 10 years, when Richardson from Access Economics reckons they’ll need to find that much in a year to prevent interest rate rises, given those tax cuts. Labor is simply making a long term rod for its back on another front too. It keeps playing the bogeyman that the battlers are being ripped off by business, rather than general inflation, due to previous lax monetary policy, but those chickens will come home to roost when it tries to introduce higher carbon pricing.

  30. observa
    December 18th, 2007 at 18:13 | #30

    Oops..$10 bill worth of savings over 4 years..

  31. December 18th, 2007 at 19:36 | #31

    Centro shareholders? Bwahahahahaaaa…. Couldn’t happen to nicer people.

    That aside, I don’t see how interest rates will matter in the slightest. When a debt cannot be refinanced and current obligations are unable to be met, the interest rate is purely academic!

  32. December 18th, 2007 at 19:48 | #32

    Currently, I’d only support tax cuts if they were accompanied by offsetting spending cuts to limit the impact on aggregate demand.

    How about cuts in the tax rate that are offset by not increasing spending. Spending in real per capita terms could sit static for a decade and we could come close to abolishing income tax in the process. What you really seem to be on about is balanced budgets. However there is little problem in delivering the promised tax cuts and continuing to balance the budget. What seems to be going on here is some sort of high tax fetish. Some form of self flagellation guilt trip perhaps. Maybe you all earn too much and the shame is unbearable.

    And why is an increase in the cost of government wonderful and an increase in the cost of credit dire?

  33. Spiros
    December 18th, 2007 at 19:50 | #33

    I like how Barry Maley describes himself in his Oz article as “a former academic”, implying he has scholarly expertise in climatology, the subject of the article.

    Maley’s field of expertise is organisational behaviour.

  34. jquiggin
    December 18th, 2007 at 19:55 | #34

    I was just about to post on this, Spiros.

  35. Sinclair Davidson
    December 18th, 2007 at 20:47 | #35

    I don’t think Adam Smith is saying profits cause inflation. That would be a new and novel theory. I suspect he is saying that business bleats a lot about costs, when – of course – normal profit is itelf also a cost of business. Our business people should complain less – if sales aren’t as high as business would like, they can always lowr their prices. That is my interpretation of what Smith is suggesting, and, indeed, what I say to my relatives who work in retail.

    From page 109 – 110 of An Inquiry into the Nature and Causes of the Wealth of Nations (my copy is the 1976 University of Chicago edition).

    In countries which are fast advancing to riches, the low rate of profit may, in the price of many commodities, compensate the high wages of labour, and enable those countries to sell as cheap as their less thriving neighbours, among whom the wages of labour may be lower.
    In reality high profits tend much more to raise the price of work than high wages. If in the linen manufacture, for example, the wages of the different working people; the flax-dressers, the spinners, the weavers, &c. should, all of them, be advanced two pence a day: it would be necessary to heighten the price of a piece of linen only by a number of two pences equal to the number of people that had been employed about it, multiplied by the number of days during which they had been so employed. That part of the price of the commodity which resolved itself into wages would, through all the different stages of the manufacture, rise only in arithmetical proportion to this rise of wages. But if the profits of all the different employers of those working people should be raised five per cent. that part of the price of the commodity which resolved itself into profit, would, through all the different stages of the manufacture, rise in geometrical proportion to this rise of profit. The employer of the flax-dressers would in selling his flax require an additional five per cent. upon the whole value of the materials and wages which he advanced to his workmen. The employer of the spinners would require an additional five per cent. both upon the advanced price of the flax and upon the wages of the spinners. And the employer of the weavers would require a like five per cent. both upon the advanced price of the linen yarn and upon the wages of the weavers. In raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad.
    They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.

  36. Spiros
    December 18th, 2007 at 20:52 | #36

    Quoting from Scripture, agsain, Sinclair?

  37. Ian Gould
    December 19th, 2007 at 12:24 | #37

    “How about cuts in the tax rate that are offset by not increasing spending.”

    So instead of unsustainably increasing demand by increasing government consumption we unsustainably increase demand by increasing consumer consumption.

    How about we keep the tax rates where they are now, invest some of the money offshore (where it’s less to result in increased domestic consumption) and spend the next couple of years getting rid of bottlenecks in the supply side of the economy like excessive bureaucracy and inadequate transport infrastructure.

    Of course, if we do invest the surpluses and do a decent job of it, they’ll result in an ongoing revenue stream that’ll let us sustainably cut taxes in future (instead of giving tax cuts that are eroded away in a year or so via higher inflation.)

  38. John Greenfield
    December 19th, 2007 at 12:28 | #38

    Terje

    Actually you are right. There is no way he could do that with any credibility, especially with budget surpluses raining like cats and dogs.

  39. December 19th, 2007 at 13:17 | #39

    Ian,

    GDP is a measure of production. If production is increasing but government consumption remains the same then please explain how private consumption of the remainder is “unsustainable”.

    Inflation is a monetary phenomena. All things being equal (eg fixed money supply) tax cuts are deflationary. As such we can choose our inflation rate using monetary policy irrespective of tax cuts.

    For a given inflation target (eg 2-3%) the government can determine the interest rate (price of credit) by being a net lender or a net borrower. Although of course they are not the only player in the credit markets.

    Tax cuts do not cause inflation. They never have and never will. At most they will cause increased interest rates if they move the government budget further towards deficit. Whether you like higher interest rates will depend on where you are in life. If you’re saving to buy a home higher interest rates mean an easier time saving and cheaper houses. If you’re paying off a morgage the perspective is different. If your a self funded retiree then high interest rates are great.

    However in a growing economy with stable government spending (ie fixed price of government) then cuts in the tax rate should be a regular event. There is no macroeconomic justification for an ever high price of government. The only argument for a higher price of government is if we want government to do more.

    We have lots of pretty charts and graphs all over the place that show movements in the price of everything from pork bellies to passionfruit. We have too few that map the unstoppable inflation in the price of government. Why can’t we have an ACCC enquiry into this price? Shouldn’t we care that we are paying ever more for the privaledge of being pushed around?

    Regards,
    Terje.

  40. Sinclair Davidson
    December 19th, 2007 at 13:43 | #40

    Spiros – yes, but there was a request for it.

  41. wilful
    December 19th, 2007 at 15:35 | #41

    Surely now is the time to be counter-cyclical, to invest and bank away our surpluses, allowing us to spend in the next down turn. Surely we should be putting surpluses mostly into infrastructure and compulsory savings plans (like super), and only a little bit into inflationary tax cuts.

    Cut middle class welfare now, raise the compulsory super levy, build major infrastructure, introduce carbon taxes, simplify the tax system, put $$ into skills and education, these are what Australia needs for responsible economic management.

  42. December 19th, 2007 at 15:43 | #42

    Wilful – Tax cuts are not inflationary.

  43. Ian Gould
    December 19th, 2007 at 23:52 | #43

    remainder is “unsustainable�.

    “Inflation is a monetary phenomena. All things being equal (eg fixed money supply) tax cuts are deflationary. As such we can choose our inflation rate using monetary policy irrespective of tax cuts.

    Tax cuts do not cause inflation. ‘

    Write that up, submit it to a peer-reviewed economics journal and wait for the call from Stockholm because you will have overturned about fifty years of economic theory.

  44. December 20th, 2007 at 07:35 | #44

    Ian,

    So the RBA doesn’t control inflation then? In essence you’re implying that Central Bank independence with an inflation target can’t work unless they control the tax code? Which is rubbish.

    Tax cuts are well known to be economically stimulatory (ie increase output). If you have more goods chasing money (ie more economic transactions) and the supply of money is unchanged then its basic logic that the value of money will rise. The logic of this won Friedman a Nobel Prize nearly 40 years ago although even then it was not original. We see the effect readily in the external measure of money (exchange rates) all the time. Growing economies frequently have currencies with increasing buying power. Australia being a current case.

    Ronald Reagan cut taxes to get the US economy going but also to fight inflation. Bob Hawke used tax cuts in the way of the Accord to fight inflation. Margaret Thatcher cut taxes whilst working to get inflation under control. And all the time other taxes in the form of international tariffs were being slashed to fight inflation. When John Howard introduced the GST (ie a new tax) lots of commentators worried that this would lead to an increase in taxation and would thus cause inflation.

    Last time I checked the Philips curve was on the nose and out of favour. And Robert Mundell already had a Nobel prize in economics. I could write such a paper as you suggest but generally speaking publication requires some element of novelty.

    Tax cuts do not cause inflation. Inflation is caused by one of two basic events:-

    1. An increase in the supply for money.
    2. A decline in the demand for money.

    Thus the black plague of the middle ages was inflationary for reason two. The inflation in Zimbabwe today is due to both. The very mild inflation during the gold rushes of the 1800s was due to reason one. However the overall deflation in Britian across that century was due to an overall increasing demand for money brought on by strong economic growth (ie industrial revolution).

    Inflation is a monetary phenomena. In so far as tax cuts have any effect it is deflationary because it stimulates more output and trade that then needs to chase money. Tax cuts increase the demand for money and thus all else being equal (which it rarely is) the value of money increases.

    Regards,
    Terje.

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