Economics of Taxation

Making sense of the distribution and lag effects

Let us explain the problem or rather challenge of choosing between Quantitative Easing (QE) and an Interest Rate reduction to stimulate economic activity, with reference to the Bell Curve diagramme above:

There are two major factors at play here:

Distribution
Time

With a bout of QE, the effect feeds into the margins of theBellcurve and it takes time for the distribution network (money supply chain) to filter the new enhanced supply into the economy at large. So there is both a distribution and time lag effect with QE.

On the other hand, with an immediate Interest Rate reduction, the effect is to cover the larger middle ground of the Bellc urve more instantly. Yes, it does depend on your wealth and debt holder structure too, but both borrowers and savers feel the effect more immediately.

But, with Interest Rates currently so low, this option is not really that feasible. With inflation running at between 2 – 5% depending on which side of the pond you are, effectively savers are paying an additional ‘tax contribution’ to the Treasury by this stealth means.

So we are back to the scenario of a tax on the stock (or wealth) of the economy, as most flows have dried up.

Therefore, join the happy queue over here.

Image from: http://agilepartnership.com/blogit/wp-content/uploads/2010/06/sadHappy.jpg

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There are in essence only two ways of taxing citizens:

A Tax on Stock (Wealth)
A Tax on Flows (Income or consumption)

Within these two tax methodologies are hidden the minutiae of the tax regime system, but at a fundamental level, any tax raising authority has to look at these two options / methodologies available to them.

Now step back second and consider the tax take flows from these two options:

With Incomes and consumption generally on the wane, where else can the taxing authority turn for sustaining or growing their net tax take? Only on the stock of capital assets held by its citizens, so expect a sustained, possibly nuanced, yet blatant attack on your net wealth over the coming few years.

Vince Cable United Kingdom Business Secretary ... — Image via Wikipedia

Another salvo was launched again from the Business Secretary, Vince Cable, yesterday and we expect a sustained rhetoric and action in the next budget cycle. Today, the main stream press are reporting rumour of lower the 50% rate to 45%, to encourage an inflow of entrepreneurial and highly skilled management talent, reversing the recent drain or threat of ‘brain drain’ from taxpayers in this tax rate band.

Tag: Economics of Taxation

QE – Our take on the Bell Curve effect

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