Report Card for Donald Trump

[Eric the Green]

(12-28-2016, 02:48 PM)Mikebert Wrote: I am losing posts or something.  I clearly recall an exchange with Warren about his concept of deflationary stimulus that still makes no sense to me.  I made a post and never got a response. I can't find it now, so I wonder if it got lost and never appeared.  The idea was if you cut a plumbers tax rate he would be incented to cut his rates which would drum up more business expanding his output.

The example was say the tax is 35% and he currently charges $100 an hour--after tax $65.  He gets a tax cut to 20%. So he cuts his rate to $90 an hour, which increases his business by 5%.  He takes home $72, more than the $65 before.  So his weekly income increases from $2600 (40*65) to $3024 (42*72) demand stimulus of $424. His old customers who were paying $4000 for a week of his labor are now paying $3600 for the same, freeing up $400 that can be spent elsewhere for a total demand stimulus of $824.  This comes at a cost of a $600 loss in government revenue for a net stimulatory impact of $224.  Looks great right?

The problem is the incentive calculation is not correct.  After the tax cut, if the plumber would not cut his rates, he will take home $80/hr.  If he then continues to work the same 40 hours a week he will take home $3200, MORE than the $3024 in the example above and do this by working LESS hours.  Why would be cut his rates and take a pay cut? In this case the gain to the plumber is $600, exactly equal to the loss in revenue and there is no stimulus, simply a transfer of money from the state to a private individual.  And unless the private individual spends all of it is will be contractionary.

I don't see how this "deflationary stimulus" is supposed to work.

Trickle-downers like Warren keep promising us a trickle, but it's only a tinkle. Give breaks to businessmen, and they keep their gains. They use it to build factories abroad, or buy other companies, or speculate on Wall Street, or buy luxury goods, or give it to their children. They don't lower their prices. They don't raise their workers' salaries. That has not been happening. Since trickle-down was instituted by St. Reagan, wages have stagnated or fallen, and prices have risen for everything, especially higher education, housing and health care. The only check on prices has come from "free trade" (i.e. outsourcing), which has also meant fewer American jobs and poorer products.