When individual lottery winners collect their millions, they enjoy a dramatic increase in their purchasing power. Suddenly, they are able to make a claim on the scarcest goods & services that the economy makes available. But what if our politicians in Washington were to decide one day to simply hand out a million dollars to every household in America? We’d all be able to share the same great experience of luxury living then, wouldn’t we? Well…no.
By re-framing marginal tax cuts as simply ‘giving’ rich people a certain amount of money, he exposes somewhat of a right wing contradiction: though RWers are often keen to scream inflation when money is doled out, they do not seem to hold the same opinion when the money is doled out to the rich. Now, you might say that taxed money doesn’t disappear; it is spent on other things, and this is true. However, if we consider the ‘Cantillion‘ effects of the distribution of spending, we might expect there to be more of a problem as the goods and services purchased by rich people become more esoteric.
I’d also like to add something to Kroeger’s thesis. As marginal tax rates decrease, people will be more inclined to ask for pay rises, as they have more to gain. If, for example, marginal tax rates were actually lower than the ones that preceded them, we’d be highly likely to experience higher wage inflation (and therefore higher general inflation).
Ultimately, of course, it is an empirical question whether cutting marginal tax rates simply inflates the price of luxury goods, thus benefiting noone but damaging the public purse. So what has happened to the price of luxury goods over the last 30 or so years, when marginal tax rates have done this:
For comparison, Forbes have an incredibly useful ‘Cost of Living Extremely Well Index’, which is shown along with the CPI here:
Clearly, the relative price of luxury goods has taken off as marginal tax rates have plummeted. Now, I don’t want to infer correlation-causation, but this seems like evidence for Kroeger-Unlearningecon effects (!), and I am having a hard time coming up with other explanations for the CLEWI rise.
But perhaps I just have a bias in favour of my new hypothesis.
Addendum: If anybody has any further evidence that is relevant to this argument, I’d be grateful.