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Why would anyone expect higher taxes to increase growth? > Under President Moon Jae-in, South Korea has raised taxes and the minimum wage in the name of econom

Why would anyone expect higher taxes to increase growth? > Under President Moon Jae-in, South Korea has raised taxes and the minimum wage in the name of economic growth. So far, it hasn’t worked out as planned. That's not how that works at all. Whoever made this "plan" apparently skipped Macroeconomics 101. > Growth has slowed, unemployment has risen and small-business owners like Moon Seung are complaining. Any Economics undergrad would tell you that's exactly the expected outcome. Raising taxes hurts growth and increases unemployment because you are reducing the profitability of all businesses. Raising minimum wage increases unemployment because you are raising the cost of labor. And small businesses often pay the highest price for these policies.

whatshisface 8y ago
When I took Economics 101 I was told that there was one school that says "taking people's money away will make the economy worse because they know how to spend it best," and another school that says, "the economy is powered by money changing hands, so if you take away money that would otherwise have sat around and use it to buy random items, you will force the economy to be more active than it would otherwise have been."
- wbl 8y ago
  Keynesian stimulus is intertemporal not redistributive.
- deleted 8y ago
  [deleted]
- pazimzadeh 8y ago
  The latter makes intuitive sense. If you give money to the poor and needy, they will spend it on things they need (food, cars, etc..) so the money will end up back in corporations' hands anyway.
  - dunpeal 8y ago
    You are assuming any of that money will end up with the "poor and needy", instead of hiring more bureaucrats whose function is often to hinder economic activity and growth by numerous rules and regulations.
- bluGill 8y ago
  I reject the idea that money is sitting around idle. Very little is - most people keep a little idle cash in their wallet and a few coins in a jar: the rest is in banks and other investments were the money is not idle it is working. When you take the money away you don't remove it from changing hands, you just remove me from the changing hand. It it good or bad to remove someone from their money? That depends a lot and is subject to lots of complex debate.
- cynicalkane 8y ago
  > the economy is powered by money changing hands The economy is powered by creation and exchange of value. Money changing hands is mistaking the incentive for the act itself. Most economic schools of thought advocate stimulus during recessions to stop a slowdown of money changing hands, but this is a short-term measure. Money isn't the economy and there's no reason to believe making money fly around willy-nilly will help the economy in a permanent way.
  - dunpeal 8y ago
    Exactly. The key factor in growth is the production of goods an services. To easily demonstrate: imagine everyone stopped producing goods and services tomorrow in the US. Everyone would still have the exact same amount of money, but you will not be able to use it to buy a fresh loaf of bread (since none are being baked) or have your car serviced. The value of money will drop to zero. It won't matter at all if it changes hands; indeed, it won't, since there won't be anything to buy. Thinking "money changing hands" powers the economy is thus mistaking effect for a cause.
  - nybble41 8y ago
    > Money changing hands is mistaking the incentive for the act itself. I think there's more to it than that. There is no particular reason to think that money changing hands benefits the economy, or society, but there is at least one party that does benefit: the government. Every time money changes hands the government takes a share in the form of income and/or sales taxes. Ergo, there is reason for the idea that higher monetary velocity is better to be popular among both politicians and the economists who advise them.
mike00632 8y ago
It's not like money paid as taxes just evaporates. It's spent, i.e. put right back into the economy.
- dunpeal 8y ago
  Except much of it is spent hiring more bureaucrats whose function is often to hinder economic activity and growth by numerous rules and regulations. These very same people would be contributing to growth if they worked in the private sector and produced goods and service. Instead, they create either zero or negative growth.
  - jonhinson 8y ago
    What do those bureaucrats do with the money that is paid with taxes? Spend it on economic activity.
    - dunpeal 8y ago
      You take a person that could be producing goods and services in the private sector, and pay him to work in the public sector, where he produces no such goods or services, and often is tasked with creating and enforcing regulations that limit economic freedom. Clearly you're going to end up with lower economic growth. The fact he would spend his salary on purchases is small comfort, especially when he'd likely earn a larger salary to spend in the private sector.
      - jonhinson 8y ago
        It's a false premise that taxation does not produce a good or service. E.g. USPS, defense contracts, farm subsidies, etc. It's not clear that you're going to end up with lower economic growth. For example, taxing some level of income that would otherwise not be spent on economic activity (e.g. savings or equity investments) and spending it on things that do result in economic active results in higher economic growth.
      - djrobstep 8y ago
ddebernardy 8y ago
It's a bit subtler than that. On paper, if you increase wages and taxes to subsidize demand, you encourage consumption. And it actually works ... provided consumers a) aren't over their ears in debt (which they are) and b) are buying from locals (which they aren't, at least for industrial goods). The French learned this the hard way during a short period in the early 1980s. They did exactly that, and it drove consumption up as expected, but this actually ended up helping more competitive manufacturers from their trading partners.
- theredbox 8y ago
  Korea is already super consumerist and much more service oriented country than the US.
  - ddebernardy 8y ago
    Exactly. Such a policy should work, on paper at least, in places like China or some SE Asian countries. It won't in places like South Korea or other places where consumers are mostly indebted (in which case they repay them instead of consuming more) or buying cheap goods from China or SE Asia (in which case manufacturers from those countries benefit most).
- xupybd 8y ago
  Does this hold up for an economy that is primarily export driven?
gizmo 8y ago
Econ undergrads might say that raising taxes hurts growth, as might highschool students. Policy experts and professional economists are very much divided on the issue. There is plenty of evidence where raising taxes appears to produce economic growth, where it doesn't make any difference, and where it appears to hinder growth. Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save. Increases to the velocity of money results in economic growth. That's one of the counterarguments to the minimum wage argument. Society is complex and when you change the minimum wage it has rippling effects on employment, housing, consumer spending, investment and so forth. On top of that you have psychological effects and signalling issues. Predicting the consequences of a minimum wage hike is hard. The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly.
- dunpeal 8y ago
  > There is plenty of evidence where raising taxes appears to produce economic growth Please cite such evidence. > Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save. Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs. Minimum-wage earners are the most vulnerable class of employees, the most easily dismissed and replaceable. As such, they will be the first to be laid off as profits decline, especially when these profits are declining as a direct result of the cost of employing them Rising cost of labor also hurts growth directly, especially when its due to government intervention and not voluntary free-market forces. > The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly. Except in this case all these "policy experts" and "professional economists" were apparently wrong, and instead of increasing growth, these changes hurt it substantially, just as Macro 101 would predict. So score one for basic economic good sense versus the "policy experts".
  - claudiawerner 8y ago
    >Rising cost of labor also hurts growth directly, especially when its due to government intervention and not voluntary free-market forces. Fine by me. A nation that does not have either strong (and not hindered by law) unions or a minimum wage to support the most vulnerable (your mention of which in the context of your comment comes across as libertarian concern trolling) does not deserve to "grow". >Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs. My solution to this is simple - abolish the wage. But I'm interested to hear to what extent this is true where minimum wages have increased so far, and whether it must necessarily happen. Taking the argument to its extreme, we ought not to pay anyone at all, since any amount >0 is a rising cost of labour and since growth is important, we out to minimize the cost of labour to zero or even lower. I'm thankful for the fact that the eight hour work day and humane conditions, thanks to the socialists and social democrats of the 19th and 20th c. have prevailed over your "voluntary free market forces".
adrr 8y ago
> Raising minimum wage increases unemployment because you are raising the cost of labor. Not paying a livable wage just socializes the burden to the taxpayers.
bsder 8y ago
> Raising minimum wage increases unemployment because you are raising the cost of labor. You have no evidence of this. And, even if true, it would only be true if the cost of labor was a significant input to cost of production. In fact, most of the minimum wage increases in the US are currently resulting in "effect, if any, is so small as to be unmeasurable." Obviously, you can raise the minimum wage to the point where it is 99% of the cost of production and that would be severely detrimental. However, given the stagnation of the minimum wage over the last decades in the US, apparently the minimum wage has quite a bit of room to increase before its contribution to the cost of production becomes an issue.

whatshisface 8y ago

When I took Economics 101 I was told that there was one school that says "taking people's money away will make the economy worse because they know how to spend it best," and another school that says, "the economy is powered by money changing hands, so if you take away money that would otherwise have sat around and use it to buy random items, you will force the economy to be more active than it would otherwise have been."

wbl 8y ago
Keynesian stimulus is intertemporal not redistributive.
deleted 8y ago
[deleted]
pazimzadeh 8y ago
The latter makes intuitive sense. If you give money to the poor and needy, they will spend it on things they need (food, cars, etc..) so the money will end up back in corporations' hands anyway.
- dunpeal 8y ago
  You are assuming any of that money will end up with the "poor and needy", instead of hiring more bureaucrats whose function is often to hinder economic activity and growth by numerous rules and regulations.
bluGill 8y ago
I reject the idea that money is sitting around idle. Very little is - most people keep a little idle cash in their wallet and a few coins in a jar: the rest is in banks and other investments were the money is not idle it is working. When you take the money away you don't remove it from changing hands, you just remove me from the changing hand. It it good or bad to remove someone from their money? That depends a lot and is subject to lots of complex debate.
cynicalkane 8y ago
> the economy is powered by money changing hands The economy is powered by creation and exchange of value. Money changing hands is mistaking the incentive for the act itself. Most economic schools of thought advocate stimulus during recessions to stop a slowdown of money changing hands, but this is a short-term measure. Money isn't the economy and there's no reason to believe making money fly around willy-nilly will help the economy in a permanent way.
- dunpeal 8y ago
  Exactly. The key factor in growth is the production of goods an services. To easily demonstrate: imagine everyone stopped producing goods and services tomorrow in the US. Everyone would still have the exact same amount of money, but you will not be able to use it to buy a fresh loaf of bread (since none are being baked) or have your car serviced. The value of money will drop to zero. It won't matter at all if it changes hands; indeed, it won't, since there won't be anything to buy. Thinking "money changing hands" powers the economy is thus mistaking effect for a cause.
- nybble41 8y ago
  > Money changing hands is mistaking the incentive for the act itself. I think there's more to it than that. There is no particular reason to think that money changing hands benefits the economy, or society, but there is at least one party that does benefit: the government. Every time money changes hands the government takes a share in the form of income and/or sales taxes. Ergo, there is reason for the idea that higher monetary velocity is better to be popular among both politicians and the economists who advise them.

mike00632 8y ago

It's not like money paid as taxes just evaporates. It's spent, i.e. put right back into the economy.

dunpeal 8y ago
Except much of it is spent hiring more bureaucrats whose function is often to hinder economic activity and growth by numerous rules and regulations. These very same people would be contributing to growth if they worked in the private sector and produced goods and service. Instead, they create either zero or negative growth.
- jonhinson 8y ago
  What do those bureaucrats do with the money that is paid with taxes? Spend it on economic activity.
  - dunpeal 8y ago
    You take a person that could be producing goods and services in the private sector, and pay him to work in the public sector, where he produces no such goods or services, and often is tasked with creating and enforcing regulations that limit economic freedom. Clearly you're going to end up with lower economic growth. The fact he would spend his salary on purchases is small comfort, especially when he'd likely earn a larger salary to spend in the private sector.
    - jonhinson 8y ago
      It's a false premise that taxation does not produce a good or service. E.g. USPS, defense contracts, farm subsidies, etc. It's not clear that you're going to end up with lower economic growth. For example, taxing some level of income that would otherwise not be spent on economic activity (e.g. savings or equity investments) and spending it on things that do result in economic active results in higher economic growth.
    - djrobstep 8y ago

ddebernardy 8y ago

It's a bit subtler than that. On paper, if you increase wages and taxes to subsidize demand, you encourage consumption. And it actually works ... provided consumers a) aren't over their ears in debt (which they are) and b) are buying from locals (which they aren't, at least for industrial goods). The French learned this the hard way during a short period in the early 1980s. They did exactly that, and it drove consumption up as expected, but this actually ended up helping more competitive manufacturers from their trading partners.

theredbox 8y ago
Korea is already super consumerist and much more service oriented country than the US.
- ddebernardy 8y ago
  Exactly. Such a policy should work, on paper at least, in places like China or some SE Asian countries. It won't in places like South Korea or other places where consumers are mostly indebted (in which case they repay them instead of consuming more) or buying cheap goods from China or SE Asia (in which case manufacturers from those countries benefit most).
xupybd 8y ago
Does this hold up for an economy that is primarily export driven?

gizmo 8y ago

Econ undergrads might say that raising taxes hurts growth, as might highschool students. Policy experts and professional economists are very much divided on the issue. There is plenty of evidence where raising taxes appears to produce economic growth, where it doesn't make any difference, and where it appears to hinder growth. Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save. Increases to the velocity of money results in economic growth. That's one of the counterarguments to the minimum wage argument. Society is complex and when you change the minimum wage it has rippling effects on employment, housing, consumer spending, investment and so forth. On top of that you have psychological effects and signalling issues. Predicting the consequences of a minimum wage hike is hard. The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly.

dunpeal 8y ago
> There is plenty of evidence where raising taxes appears to produce economic growth Please cite such evidence. > Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save. Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs. Minimum-wage earners are the most vulnerable class of employees, the most easily dismissed and replaceable. As such, they will be the first to be laid off as profits decline, especially when these profits are declining as a direct result of the cost of employing them Rising cost of labor also hurts growth directly, especially when its due to government intervention and not voluntary free-market forces. > The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly. Except in this case all these "policy experts" and "professional economists" were apparently wrong, and instead of increasing growth, these changes hurt it substantially, just as Macro 101 would predict. So score one for basic economic good sense versus the "policy experts".
- claudiawerner 8y ago
  >Rising cost of labor also hurts growth directly, especially when its due to government intervention and not voluntary free-market forces. Fine by me. A nation that does not have either strong (and not hindered by law) unions or a minimum wage to support the most vulnerable (your mention of which in the context of your comment comes across as libertarian concern trolling) does not deserve to "grow". >Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs. My solution to this is simple - abolish the wage. But I'm interested to hear to what extent this is true where minimum wages have increased so far, and whether it must necessarily happen. Taking the argument to its extreme, we ought not to pay anyone at all, since any amount >0 is a rising cost of labour and since growth is important, we out to minimize the cost of labour to zero or even lower. I'm thankful for the fact that the eight hour work day and humane conditions, thanks to the socialists and social democrats of the 19th and 20th c. have prevailed over your "voluntary free market forces".

adrr 8y ago

> Raising minimum wage increases unemployment because you are raising the cost of labor. Not paying a livable wage just socializes the burden to the taxpayers.

bsder 8y ago

> Raising minimum wage increases unemployment because you are raising the cost of labor. You have no evidence of this. And, even if true, it would only be true if the cost of labor was a significant input to cost of production. In fact, most of the minimum wage increases in the US are currently resulting in "effect, if any, is so small as to be unmeasurable." Obviously, you can raise the minimum wage to the point where it is 99% of the cost of production and that would be severely detrimental. However, given the stagnation of the minimum wage over the last decades in the US, apparently the minimum wage has quite a bit of room to increase before its contribution to the cost of production becomes an issue.