Economic commentary on tax cuts, Say’s Law, and human capital taxation

Tax cuts can be faster-acting than spending programs because they obviate the construction period. Freshwater economists argue plausibly that they are likely to prove ineffective. They foresee “rational expectations” of taxpayers as predicting eventual restoration of the taxes when full employment resumes. This gives a motive to save the tax cut rather than spend it as intended. | see it a little differently. Most consumption is maintenance or investment to keep up human capital. We will need that earning power when taxes are restored. Say’s Law Jean Baptiste Say, in writings I haven’t read, argued two centuries ago that supply creates its own demand. The logic is sound to a point. The claims on output simplify to pay plus profit. The asterisks don’t matter here. Thus pay plus profit is always enough to clear that market. There could be “partial gluts” when we produced too much of one thing and not enough of another, but never a “general glut” where production got ahead of our means to pay for it. All too true. Consumption plus investment equals pay plus profit. But the sad fact is that profit can be negative. Deadweight loss happens. When it happens, at the collective scale, even pay claims may be left unsatisfied. Say’s law gives no comfort except where outcomes are as expected. Tax Considerations Schultz in 1962 argued that educational (human) capital is overtaxed. What he wrote was: “The established tax treatment takes account of both depreciation and obsolescence in the case of physical capital, but this accounting is not extended to human capital”. He was right. Income tax is charged on net profit of firms and pay of workers. Pay measures gross realized work including human depreciation. Tax laws now counter that imbalance by applying lower rates to pay as “earned income”. If we could measure human depreciation, or model it with enough Chapter 8 Banks, Money and Macroeconomics 2/8/16 19 HOUSE_OVERSIGHT_011108