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Save It

The Arizona Republic this morning had some goofy headline in their print edition that said something like "How should you spend your $800 tax rebate?"  Far be it for me to presume to tell people how to spend their own money (what do I look like, a Congressman?) but here is a bit of advice:  Save it.  Because this is not a grant, it is a loan.

All of these rebates will be paid for with additional deficit spending.  This means that everyone will eventually pay for their rebate in the form of a) higher future taxes; b) higher future prices due to inflation; or c) increased job insecurity and/or lower future earnings due to reduced output in the economy; or d) all of the above.

It HAS to be this way.  Unlike private wealth creation, the government can't get wealth from nowhere.

Posted on January 25, 2008 at 04:05 PM | Permalink

Comments

I thought it was a grant for BAG day! B-)

Posted by: Rob | Jan 25, 2008 6:22:07 PM

It's not even a loan - they're just deciding to keep slightly less of your money, and wait and see, I betcha they'll consider this taxable income..

Posted by: HTRN | Jan 25, 2008 6:43:32 PM

Is this in reference to the Gov't wanting to give every tax payer $800 this summer? My dad was saying something about it.

It is a bit weird. Obviously the money has to come from somewhere...people always tend to forget that essential part of it.

Posted by: la petite chou chou | Jan 25, 2008 7:09:01 PM

I copied this story from another site:

Now this is the best explanation of how our Tax system works.

Bar Stool Economics
Suppose that every day, ten men go out for beer and the bill for
all ten comes to $100. If they paid their bill the way we pay our taxes,
it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar
every day and seemed quite happy with the arrangement, until one day, the
owner threw them a curve. 'Since you are all such good customers, he
said, 'I'm going to reduce the cost of your daily beer by $20. Drinks for the ten
now cost just $80.

The group still wanted to pay their bill the way we pay our taxes
so the first four men were unaffected. They would still drink for free.
But what about the other six men - the paying customers? How could they
divide the $20 windfall so that everyone would get his 'fair share?' They
realized that $20 divided by six is $3.33. But if they subtracted that from
everybody's share, then the fifth man and the sixth man would each end up
being paid to drink his beer. So, the bar owner suggested that it would be fair
to reduce each man's bill by roughly the same amount, and he proceeded to
work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four
continued to drink for free. But once outside the restaurant, the men began to
compare their savings.

'I only got a dollar out of the $20,'declared the sixth man. He
pointed to the tenth man,' but he got $10!'

'Yeah, that's right,' exclaimed the fifth man. 'I only saved a
dollar, too. It's unfair that he got ten times more than I!'

'That's true!!' shouted the seventh man. 'Why should he get $10
back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get
anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the
nine sat down and had beers without him. But when it came time to pay the
bill, they discovered something important. They didn't have enough money
between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is
how our tax system works. The people who pay the highest taxes get the
most benefit from a tax reduction. Tax them too much, attack them for being
wealthy, and they just may not show up anymore. In fact, they might start
drinking overseas where the atmosphere is somewhat friendlier.

Posted by: CT_Yankee | Jan 25, 2008 11:57:47 PM

The correct answer is:

Gannett finally fired Ward Bushee? After all he’s done for the magnificent paper he defecated (i.e shat) upon?

Truly, utterly, and convincingly shocking…..

I’m shocked. Such a fine journalist…

Shocking….

Posted by: Mesa Econoguy | Jan 25, 2008 11:59:47 PM

It is not a grant, it is not a loan, it is our own money that we worked for and the government doesn't take. It doesn't have to be paid because money the government doesn't take from me in a tax has been earned and not bought. Taking less taxes doesn't causes deficits, spending more money than you take in causes deficits. What has to be paid for is the spending done by government.

Spending doesn't necessarily cause inflation, too much demand and not enough supply causes inflation. An additional spending of $150 Billion is not large enough to increase demand enough to create any serious supply problems.

How can increase spending cause reduce output of the economy? If we having more money to spend hurts the output of the economy let increase taxes and really improve the economy.

Increase taxes are coming in two year when Bush's tax cut expire since the Democrats are unlikely to make them permanent, plan to lose 3% of you income, that will hurt the economy.

Government isn't creating wealth with this plan, but taking less of ours. Again, tax cuts (rebate is a short term tax cut) doesn't create problems, overspending by the government is the problem.

For those that say forgo tax cuts so the government doesn't have to do deficit spending, I say you can't give the government enough money, the more you give the more they spend. Increased revenue hasn't caused less spending.

Posted by: will | Jan 26, 2008 4:04:29 AM

Will,

If it's a rebate and not a grant, why are people who pay less than $300 in taxes getting a rebate? Why are people who make more than $75,000 ($150,000 for couples) getting their "rebates" reduced by 5% for each $1,000 in income? Why are some Senators pushing for seniors living on Social Security (who don't pay taxes) to also get a "rebate"? None of those features sound like "rebates."

Posted by: Andrew | Jan 26, 2008 6:32:16 AM

It's more of a rank wealth transfer because people above a certain income ($75,000 single, $150,000 married) will not get it, but can expect to pay for most of it.

Posted by: diz | Jan 26, 2008 8:40:05 AM

At best your argument holds for people who don't pay federal income taxes are getting a grant. The high earners are being stiffed and the rest getting a rebate on taxes. Since the deal isn't done yet the current plan does not include SS seniors unless they pay more than $3000.00 in taxable income. If that is included then you can count that as a grant or a rebate for previous taxes paid.

Andrew would you like the plan if only those who pay fed taxes get the money? Is you complaint about the give away to the non-taxpayers and if so are you against the earned income tax credit? If you are also against the rebate for taxpayers then way, because it will reduce tax revenues?

Also some other things to thing about. There are federal taxes on more than just income. There is federal excise tax on several things such as fuel and other things such as cigarettes, alcohol (which low income people also uses) and firearms/ammunition. There a reason the ATF is part of the Treasury Department and not the Justice Department, it's about collecting revenues.

The 1990 tax increase on gasoline was 5 cent with 2.5 going to the general fund and the rest to the highway trust fund but 1 cent to mass transportation.

Everyone in this country is paying some federal tax in one way or another.

Posted by: will | Jan 26, 2008 9:20:20 AM

Will: Inflation is when the government increases the amount of fiat money. Supply or demand of a particular good or service is irrelevant. What in the world could make the price of all goods and services go up?

Posted by: Bearster | Jan 26, 2008 10:26:29 AM

I agree it's a weak stimulus with a small chance of accomplishing much, especially given the defecit, but I don't think it should be entirely poo-pooed.

The vast majority of people do pay way more than $600 in some sort of federal tax, and if people are allowed to keep more of their money, they will have more money, and they could spend it or save it in a bank or buy a lawnmower if they run a landscape service. If it makes it's way to a bank, the bank may loan it out to someone making an investment in capital, especially now with the lower interest rates. Consumption and capital investment both increase GDP, which might, just might, be enough to decrease or avoid a recession.

Yes, inflation is a worry, but it depends on so many things, and I don't think such a relatively small and one time event like this would really have a long-lasting effect. (Although I do think inflation can occur regardless of whether "fiat money" is increased. For instance, it can occur if people generally value the dollar less. A dollar is just a piece of paper that is only worth as much as someone else is willing to make believe its worth, which is of course also affected by how much the central government is make-believing it is worth.)

Posted by: Bill | Jan 26, 2008 11:30:06 AM

CT Yankee,

I think the bar stool example is an excellent demonstration and theoretically sound. However, I also think we are very far away from that tipping point in practice.

Other western countries have way higher taxes, and countries that might give you a tax break have more kidnappings, different languages, more dangerous traffic, and more pollution. The U.S. has the most billionares in the world, and they don't seem to be moving away, as far as I know. Plus, the richest guys are getting some pretty good bang for their buck if they send their kids to a big public reasearch college, have a million dollar mortgage, or own a lot of physical capital which our tax code generously allows for rapid depreciation. Also, the military is protecting our (and disproportionately their) financial interests overseas (Gulf War I, maybe II, and probably also Afghanistan). Furthermore, taxes that go to infrastructure disproportionately benefit the rich who hold stock in companies which use highways, airports, sell to medicare, etc. Also, those payments to the four guys drinking for free keep kidnappings and robberies down, and those guys are paying their own taxes on beer, cigarettes, lottery tickets, and sales tax.

I'm just saying, it ain't so bad as the top marginal tax rate implies, given all the benfits, and considering the alternatives.

Posted by: Bill | Jan 26, 2008 11:41:34 AM

I'm just saying, it ain't so bad as the top marginal tax rate implies, given all the benfits, and considering the alternatives.

I'm fascinated that reasonably intelligent people continue to quote this canard as if they beleive it.

First, the majority of our federal government expenditures are no longer on "public" goods. If the government pays for your medical care or sends you a check for your retirement that check is rival and excludable. It is a specific benefit to a specific person. We can track whether this money is being spent on top quartile people or bottom quarltile or whatever. We don't need to rely on the old canard that the "rich get proportionately more benefit from government".

Second, I have a rather tough time believing that the benefit I recieve from US military activities is somehow proportional to my income. My income, as best I can tell, is a function of what calue my employer thinks I create and the relative scarcity of my particular skills in the market. It's very unclear what relationship there is between any of these and the US military being in Afghanistan or not. According to your logic, if I get a raise tomorrow, it's because I am benefitting even more from the troops being in Afghanistan than I was today? That seems like a tough argument to defend.

At best it can be argued that it's more fair for the rich to pay a higher share of public goods.

It does not seem reasonable to believe it actually costs the government more to defend the extra zeroes in my bank account.

Posted by: diz | Jan 26, 2008 12:50:52 PM

Inflation: the increase in goods and services over a period of time.

While high rate of inflation is caused by increase in the money supply, I was not referring to that. I was thinking more of a moderate of inflation having never experienced high rate. Moderate rates of inflations can be caused by increased demand. For example, gasoline prices have increased over the last several years from about $1.50 to $3.00, this was not caused by "fiat money" but by increase demand and supply not keeping up with it. Demand increases, price increases, supply increase because more demand means more profit, people use less because of greater cost, but the price is still inflated above what it was. $600 per person is not going to seriously increase the money supply nor erode American confidence in the dollar.

As for the deficit; it has been shrinking as revenues increased, last year it was less than 2% of the GDP and an additional $150 billion is going to seriously increase the deficit as to cause serious problems given that any tax cut (rebate) isn't revenue neutral.

The bigger problem is not the deficit but Social Security. It was a bad plan from the beginning, it has been a generational transfer of income from the young to the old. It's a time bomb waiting to explode. GW wanted to start us down the road of reform but you see how far he was able to get.

Also $175,000 for a couple isn't rich. Try living in New Jersey and working in New York City.

I'm for less spending, less taxes, less government regulation and to push power down to the lowest possible level. I also reject the ides that the government taking less of my money is subsidizing me or giving me a grant or a loan, it's my money, not theirs, I worked for it, I earned, the government didn't give it to me.

Government should take less and spend less.

Posted by: will | Jan 26, 2008 12:59:03 PM

Actually, it will not be the case that "everyone will eventually pay for their rebate." Those of us who earn too much money to get this rebate will not only pay for the rebates of others, but will also suffer from the other indirect taxes you mentioned. So some of us will pay big for no reward at all.

Posted by: John | Jan 26, 2008 4:33:38 PM

I believe that failing an actual cut in spending to cover for a tax rebate/grant/stimulous nonsense, the following holds:

I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
- Winston Churchill

Posted by: Rob | Jan 27, 2008 3:33:14 PM

Will: you gave a partial analysis of how the price of a single commodity could go up. But inflation-an increase in prices ACROSS THE BOARD--is not due to the so-called "law"* of supply and demand. It is due to increases in the fiat money supply.


*In reality, the law that governs such things is Say's Law, which states basically that supply creates demand and vice versa. The first part says that prices are elastic. In the 1950's, IBM famously declared that the market for computers were a few dozen machines worldwide. But as the price falls, more people find they need one. There are now computers in every home appliance, automobile (several), hotel room doors, etc. The second part says that as demand goes up, more producers are attracted to the market. How many investment dollars are chasing the latest buggy whip technology? How about wireless?

Posted by: Bearster | Jan 28, 2008 9:10:25 AM

It's even worse than that, isn't it? Isn't it just a loan from the government that you'll have to subtract out of your refund the next year the way we did in 2001?

Posted by: Noumenon | Jan 28, 2008 10:05:29 AM

Diz,

Here is my response after looking up "canard" in the dictionary. I don't think my post was unfounded, and here is why, on more of a macro or philosophical level:

Your wage is not really a function of the relative scaricty of your skills in the market, it is a function of the relative scaricty in the market, given the mechanisms in place in which the market is held. These mechanisms include military protection (of the homeland and interests abroad) FDIC insurance, police, fire, legal system, etc. Simply put, these things are all generally insurance-type mechanisms which protect assets and property, and necessarily protect rich people more, simply because they have more to protect. It is true that rich people pay more for this protection, but again, they're also getting more protection. And just to play devil's advocate, I will sugegst that this "protection" includes most wealth transfers, which have an overall stabalizing effect on society.

I am assuming you would not be able to make as much income as you now are in other western countries, or anywhere else. If you view it from a game-theory perspective, you should be willing to pay taxes in the amount of the extra income you can earn from all these mechanisms, (even the bad or inefficient ones you don't like which take money away from you), if all together, those good and bad mechanisms allow you to earn more than your second best alternative.

Now, you're probably saying I just pointed out the obvious, and that the best of a bad lot doesn't mean its not still a bad lot. But I would argue that empircally, looking at other wealthy nations, you will still observe large if not larger wealth transfers. And yet, people are wealtheir than in other places with less transfer taxes (excluding outliers). Therefore, while tinkering with wealth transfer policy to improve individual outcomes should continue, I think you can loose the forest for the trees with respect to looking at how your money flies out of your paycheck, but not appreciating what allowed you to earn and enjoy the money in the first place. In conclusion, I think it is quite possible that we could end up paying more costs if somem transfer payments were decreased.

Posted by: Bill | Jan 28, 2008 10:54:08 AM

I am assuming you would not be able to make as much income as you now are in other western countries, or anywhere else. If you view it from a game-theory perspective, you should be willing to pay taxes in the amount of the extra income you can earn from all these mechanisms, (even the bad or inefficient ones you don't like which take money away from you), if all together, those good and bad mechanisms allow you to earn more than your second best alternative.

I find your perspective rather odd. When someone points a gun at my head I find i am very willing to give them my wallet. It is better, perhaps, than my next best alternative. I'm not sure what this justifies, however.

Anyway, my objection to your earlier post was rather narrow in scope.

I think the idea that "the rich receive disproportionate benefit from government" is an idea that can be somewhat objectively evaluated and found to be false.

Perhaps a little thought experiment:

Suppose you had a security busness that guarded people's bank accounts against fraud. You had to get people to voluntarily pay for the benefit you were providing them. Do you think the price of your service would be linearly proportional to the amount of money in the account?

Would you be able to charge 1000 times as much for a $1,000,000 account as for a $1000 account?

It doesn't seem very likely to me. The cost of providing security to each account would be about the same.

Now, suppose both my neighbor and myself live in a $500,000 house and drive 20 miles to work. My income is $180,000 and my neighbors is $120,000. Does it cost the government more to provide me roads and fire protection than it costs them to provide that service to my neighbor? Why should I pay significantly more for those services?

Government is, after all, a provider of certain services. Many of these services could or would be provided to others. If government provides me with service X but charges me three times as much for service X as another provider would, it's disingenuos to claim government is providing me with a "benefit". And, since it's quite hard to build a case that the cost of providing any of those services is proportional to income, it seems plainly evident that a system that provides services based on taxed income does not disproportionally those with higher incomes.

Posted by: diz | Jan 29, 2008 10:54:48 AM

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