Apparently, taxation acts as a stabliser...

From a forum I frequent:

The income tax serves as key stabilizer to the economy, as can be shown:

Y = C + I + G + X-IM

C = a + b*DI

Assume a flat is in effect of T = tY

C = a + b*(Y-tY)

C = a + b*(1-t)Y

Y = a + b*(1-t)Y + I + G + X-IM

Y - b*(1-t)Y = a + I + G + X-IM

Y(1-b*(1-t) = a + I + G + X-IM

Y = (1/1-b*(1-t)) x (a + I + G + X-IM)

This is opposed to:

Y = a + b*Y + I + G + X-IM

Y-b*Y = a + I + G + X-IM

Y(1-b) = a + I + G + X-IM

Y = (1/1-b) x (a + I + G + X-IM)

Now, you'll note that in example one, we have a expenditure multiplier of 1/1-b*(1-t) as opposed to 1/1-b in example two. Since t>0, this means that eh expenditure multiplier is, in fact, smaller in the first example where have a flat income tax. The stabilization grows even stronger with a progressive income tax.

Ron Paul's drastic cuts in government size in spending may sound nice to those who prefer smaller government, but it would (first of all) be a major contraction in the economy (something to save for far better times) and would result in permanent state of lesser stability.

Isn't this just based on fallacies, like the multiplier effect?

britainland:

Isn't this just based on fallacies, like the multiplier effect?

 As far as I can tell, its a bunch of Keynesian nonsense.  As far as tax cuts being "a major contraction in the economy", that's just plain false.  I think that results from the fact that the GDP includes ALL government expenditures.

Someone more versed in Austrian economics than I will have to show you how the rest is wrong :-)

Remove G from the equations, and it will stabilise just fine. What their hidden assumption is, is that the injections of "liquidity" by the Fed constitute real wealth. They do not. And all the Keynesian mathematical psycho-babble in the world will not save them from having to explicitly define their terms, and prove that what they say is in fact so. Here's some brief criticism of the Keynesian paradigm.

-Jon

Libertas est Veritas:

Blaargh no understand.

Is there some kind of a model behind all of this?

Yes. I'm taking a final exam on this bullsh*t tonight and even I don't understand it. I mean, I understand the concept, but I haven't memorized all the algebraic symbols it uses.

Anyway, it is all rather silly trying to predict human action with mathematics. I'd object to it on that basic fact. In the real world, a single, conscious individual decision can (and usually does) effect a paradigm shift that renders the model inefficient, if not just plain wrong. Keynes wanted to believe that people were robots.

We aren't robots.

MacFall:

I understand the concept, but I haven't memorized all the algebraic symbols it uses.

Libertas est Veritas:

MacFall:

I understand the concept, but I haven't memorized all the algebraic symbols it uses.

What is the concept? I'm just curious, because it's starting to look like the math-statists are some cult, where only the initiated are allowed to gaze upon the divine truth.

It is hard to find all the definitions of the variables. I recognize only a few of them, as I am only ending my first semester of macro economics. I believe that C is consumption, Y is income, I is investment...

and that's all I remember. Most of what we've learned this year has been general concepts. We've only brushed the surface of the models and formulae themselves.

britainland:

Isn't this just based on fallacies, like the multiplier effect?

Exactly. The conclusion here is deducted from the multiplier effect, which in turn is deducted from the false keynesian theory of the business cycle. It demonstrates that in the keynesian model, an increasing t (tax rate in percentage form) is inveresely proportional to the multiplier. In fact, in this model, a tax rate of 100% would remove all business cycles forever and lead to full employment. Just another example of the absurdity of using mathematical models to explain human behavior.

For those of you interested, the basic National Output Equation looks like this:

GDP = C + I + G + EX - IM

"GDP" is gross national product

"C" is consumption by households

"I" is investment in productive assets

"G" is government spending

"EX" is exports

"IM" is imports

Hope that helps you guys understand the equation shown by the thread starter.

One a side note, what forum did you find this equation in?

britainland:

C = a + b*(Y-tY)

C = a + b*(1-t)Y

plus, a = the absolutely minimal amount of consumption to survive

b = a percentage of net income C that is spent

however, this equation is missing a lot even keeping it under the keynesian equation.  First, keynes also derives that Savings (S) = I (and we all know this isn't true since the fed distorts the interest rate so we never see this equilibrium, but anyway) so we would have to replace I with (1-b)* (Y-tY) + (tY - G).  Also, he is also assuming no taxes without the income tax, which simply is not the case, there are excise and tariffs etc. 

Anyway, those are some flaws.  I would work through it more but I just got done golfing and am a little tipsy and going to meet my friends.