When the economy stalls, political leaders and policymakers normally resort to either more government spending or interest rate reduction to jumpstart the economy. These are tired and testy policy instruments used over the centuries. I have previously argued that government spending is a false cure and I wish to add that interest rate reduction is only a welcome development to those who have access to credit and favors only the rich and the middle class but not the multitude of people who are stuck in the mud. Are we left with no other choice? Actually, there is. But this is something people in the government will oppose to vigorously and for good reason. I call this the Velocity Solution.
To those introduced to basic Macroeconomics, Nominal Income (NI or GDP) is a product of the total amount of money in circulation and the velocity of money for all transactions. Simply put, how much money we all have and how fast it changes hands determine total income. Both, of course, are affected by taxes such as income tax and value-added tax. Personal income tax reduces personal disposable income and corporate income tax reduces retained earnings that would have been available for reinvestment. Value-added tax (VAT), on the other hand, increases the price of the final output in an alarming rate as various inputs that add value to produce the final output is being levied a tax. VAT is the most onerous evil ever created that adds burden to the cost of production every step of the way before food, clothing, and shelter are avaible to be eaten, worn, and lived in, respectively.
Now consider this, if income and value-added taxes were abolished, working people would have more money to buy goods and services at cheaper prices; businesses would be encouraged to reinvest more since they would have more retained earnings, the cost of inputs to production cheaper and the market wealthier. This creates more employment which in turn increases the number of people with more money. This will multiply GNP a hundred times more than what the government spending has advertised to achieve.
If the government is indeed sincere in jumpstarting the economy all it must do is to abolish all forms of income taxes and VAT. This will have an immediate and widespread effect. Private Consumption and Investment will go up in leaps and bounds and without possibly any accompanying inflation. Surely, Government Consumption will be reduced but who cares Care Bears? The greater multiplier effect of private consumption and investment will more than compensate for whatever loss there will be in government expenditure.
The problem with government spending is that it is non-inclusive, the trickle-down effect is painstakingly slow and without need for overemphasis, it is historically pockmarked with corruption as many and as frequent as the potholes on the roads and bridges that the government builds. In contrast, the abolition of all income taxes and VAT is all inclusive, has immediate effect, trickles down, up, and sideways, and it will eliminate at least that part of corruption in the collection of income taxes and VAT.
I understand, however, that this proposal will meet vigorous opposition from the government and its taxman because for one abolishing income taxes and VAT will greatly reduce the amount available for corruption and the power that comes from having a lot of money without really working hard for it.
P.S. If you agree on abolition of income taxes and VAT, please feel free to share this around until the sound is so loud it will reverberate in the ears of our politicians and policymakers and wake them up in their sleep that they can do nothing to resist its eventual demise.
To those introduced to basic Macroeconomics, Nominal Income (NI or GDP) is a product of the total amount of money in circulation and the velocity of money for all transactions. Simply put, how much money we all have and how fast it changes hands determine total income. Both, of course, are affected by taxes such as income tax and value-added tax. Personal income tax reduces personal disposable income and corporate income tax reduces retained earnings that would have been available for reinvestment. Value-added tax (VAT), on the other hand, increases the price of the final output in an alarming rate as various inputs that add value to produce the final output is being levied a tax. VAT is the most onerous evil ever created that adds burden to the cost of production every step of the way before food, clothing, and shelter are avaible to be eaten, worn, and lived in, respectively.
Now consider this, if income and value-added taxes were abolished, working people would have more money to buy goods and services at cheaper prices; businesses would be encouraged to reinvest more since they would have more retained earnings, the cost of inputs to production cheaper and the market wealthier. This creates more employment which in turn increases the number of people with more money. This will multiply GNP a hundred times more than what the government spending has advertised to achieve.
If the government is indeed sincere in jumpstarting the economy all it must do is to abolish all forms of income taxes and VAT. This will have an immediate and widespread effect. Private Consumption and Investment will go up in leaps and bounds and without possibly any accompanying inflation. Surely, Government Consumption will be reduced but who cares Care Bears? The greater multiplier effect of private consumption and investment will more than compensate for whatever loss there will be in government expenditure.
The problem with government spending is that it is non-inclusive, the trickle-down effect is painstakingly slow and without need for overemphasis, it is historically pockmarked with corruption as many and as frequent as the potholes on the roads and bridges that the government builds. In contrast, the abolition of all income taxes and VAT is all inclusive, has immediate effect, trickles down, up, and sideways, and it will eliminate at least that part of corruption in the collection of income taxes and VAT.
I understand, however, that this proposal will meet vigorous opposition from the government and its taxman because for one abolishing income taxes and VAT will greatly reduce the amount available for corruption and the power that comes from having a lot of money without really working hard for it.
P.S. If you agree on abolition of income taxes and VAT, please feel free to share this around until the sound is so loud it will reverberate in the ears of our politicians and policymakers and wake them up in their sleep that they can do nothing to resist its eventual demise.
