in saving is going into the financial markets, and $95 billion in household income is spent on consumer goods and services. If instead the government collects the $100 billion via a proportional income tax the whole thing flows to the government $100 billion in taxes, and government spends that $100 billion on consumer goods and services. So the effect here is of this collection of $100 billion by the government is to reduce saving by $5 billion dollars. Reducing saving by $5 billion is a net increase in consumption spending in the economy. Although this is not good I think an argument can be made that the effect on economic growth will be relatively small assuming the tax rate is kept within reasonable limits. Now what people think is reasonable changes over time, but obviously if the government uses a proportional tax to take 90% of peoples income that’s going to be a disaster. If it stays around 20 or 30% which is what people are finding acceptable today. I think best the way to describe this is as follows. According to Buechner what we end up with is a substitution of consumer spending by government for consumer spending by households. (Recording) Essentially that is what this tax does. Instead of the people buying the consumer goods they want there money is used to buy consumer goods the government wants, and the net affect on the allocation of capacity between adding capacity and consumer goods I think would be relatively minor. Now looking at a progressive tax it’s worse.Table 9Now everything here is the same except the saving. I’m now assuming the $100 billion is left in household’s hands this saving is $10 billion. Now why is it higher? This is because a progressive tax takes a larger percentage of higher incomes. A progressive tax going back to the example I was using before maybe the rate is 10% for a $10,000 so you pay a $1000 if your income $10,000, but if you’re making a $100,000 your rate ma...
