If a country spends less, then it also has an effect on its tax income. This can even cancel out the cut.So if the government gives £100 million to a construction company that money flows around the economy and the government recoups some of it through taxes when it pops up in various places like profits and wages. But unless the combined tax rates come to at least 100% there is surely no way that cutting that £100 million ends up costing the government £100 million in lost tax revenue.
Let's investigate why. A cut in orders means that the construction companies will make less profit and pay less corporation tax. They will buy fewer bricks. They and the brick factory will cut their staff.
In turn these newly unemployed will pay less income tax as they become unemployed. They will also spend less in supermarkets, thus hitting their profits and ability to pay tax. Other tax payers will face a bill for their unemployment benefits.
Friday, 5 August 2011
100%+ Tax Rates?
I came across this organisation called "false economy" that argues that the cuts are wrong. On one page they argue that dealing with the national deficit/debt cannot be compared to dealing with credit card debts. They explain that you can spend less on your credit card without affecting your income but not if you're a country. True. But this claim seems to totally not hold water: