lower taxes = more spending?

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November 16, 2009 by Katie.

I was in New Hampshire this weekend and participated in a fervent discussion during which my conversation partner insisted that raising taxes for those with more money would actually hamper efforts to boost the economy.  According to this person, upper-middle class people are the people who keep the economy going by purchasing high-ticket items more regularly: a new tractor-mower, a nicer (Ford!) truck, re-doing their houses, etc. etc.  If taxes are raised, these people will be less likely to purchase these items, thus decreasing consumer spending.  I argued that anyone who feels their financial situation is secure spends money and contributes to the economy on a regular basis.  Additionally, I said that I was suspect of her example, that I did not feel all upper-middle class people reconsidered their spending when taxes increased because they had enough of a safety net to be able to legitimately afford those bigger purchases.

On the tax side of the issue, this person was arguing that you should tax everyone the same; richer people shouldn’t be taxed at a higher percentage rate.  If taxes are 3%, you will get more out of a person with more income because, obviously, 3$ of $100,000 is more than 3% of $20,000.

On an economic side, she was arguing that higher taxes decreased consumer spending, which is something we desperately need to try to jump start ourselves out of the “recession” (which, I think even definitionally is no longer a valid term, but whatever makes us feel better, right?).

The first statement makes sense, but what do you do when that’s not enough money?  The second statement, I really don’t agree with.  I am hard pressed to believe that merely consumer spending is going to get us out of the depression.  I also am a fan of higher taxes for richer people, who won’t *really* notice the difference, or for all people, if it results in legitimate, necessary services (like…I dunno…healthcare?).

I really don’t know much about economics, though.  So, discuss.  All two of you who are reading this…. 🙂

Suggested Reading(?):

The Wealth of Nations – Adam Smith
Keynes: A Very Short Introduction  – Robert Skidelsky

PS: I read a disturbing article in the NYT that pitted women’s rights against the current healthcare bill.  Post on that forthcoming….

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