C’mon, Water is Supposed to be Wet!

Has anyone ever said that ? Water is so wet ?!”

Hopefully  no one =]]  YET we do say it in many other cases as I used to think that “Tax disparity is no goodorThe Government shouldn’t spend more

You would say “Really?!?!?!” in some kind of shock as I was during my macro class =]]

My explanation below may have some economic terms yet I hope it’s  still easy and helpful enough for you to grasp

1. Water is wet as tax is NOT meant to be fair but to help alter the macro outcome during recession/inflation.

There are two main types of tax: Progressive (high income, higher tax rate) and regressive ( higher amount, less tax rate). How does that work, especially the progressive tax ?

Simply, during a recession, you earn less. Therefore, you have less personal income. Obviously you have lower tax bracket. (remember higher income, higher tax rate so less income, less rate) . As a result, the amount of income you have left after paying tax increases. Then you’ll be able to consume or to continue to consume which helps pushing the GDP to cure the recession. 

The same rule applied in inflation case:

Higher Income –> Higher tax bracket –> Less Income at yield (after tax) –> Less consumption –> GDP drops

2.Water is wet as the government should spend or the economy will get worse.

Note that government expenditure is not for a summer vacation of the President but defense, infrastructure, healthcare, etc. By saying the government should spend, I disregard its effectiveness of its budget use. That’s another issue but we now only focus on the reason why it has to spend anyway to help the macro economy

Due to the size of its purchase and spending, the government expenditure significantly influence the macro outcomes, specifically the aggregated demand (the total demand for economic outputs). It directly alter the market when individual fails to maintain/increase consumption

For example: during the recession when individual is earning less and (single) demand declines. The government would spend more in order to DIRECTLY increase the aggregated demand so that the aggregated demand and aggregated supply would possibly stay at equilibrium. If the government stops spending during recession, the national economy would get even worse since demand keeps tremendously decrease.

So never say the government shouldn’t spend more if you wanna die soon. That’s one of the most powerful tool to help the economy since the gov expenditure is significant and directly push up/restrain the macro outcome. Taxation only INDIRECTLY affects the economy by inducing the changes in consumption and investment. The two as a whole are two instruments of every nation fiscal policy.

That’s might not be a detailed explanation yet simply enough (I hope) to clear out some misconception regarding those two issues.

I’m not promoting my major yet basic knowledge about economics does help you become much much wiser and not to be fooled by the media and the politicians. The opposite party usually blame the other for spending too much so that they will get in. Therefore, it’s just a politically-driven issue if you hear “The government (led by the other party) shouldn’t spend more!”. Literally, it means “let’s vote for us then we can manage the budget better”

So yea, the reality of wealth wouldn’t perplexed you that much if you know more about it, accurately without any biased information ;)

Any comments/suggestions/correction is highly appreciated!

Thank you!

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2 Comments Add yours

  1. Hi there! I accidentally came across your blog and, well, this entry as well. Theoretical economy is pretty much controversial since there are tens of schools of thoughts on economy, each of which is relevant in certain cases. I believe that government spending doesn’t always work in recessions. There are certain cases when inflation goes rampant during a recession (a.k.a stagflation), meaning slow growth accompanies high prices simultaneously. In such cases, it is very hard for conventional fiscal policies to effect since a dip in taxes will be immediately countered by a rise in government spending. As far as I know, a boost in government spending will spur the economy to grow more by incentivizing businesses to produce more, which will usually result in an increase in prices/ kick start inflation. Hence, the amount of money gained from tax cuts will be counteracted by the increase in inflation. Just my 2cents, though

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    1. Thank you for your sharing, anh ! I really appreciate. Just as you said, you and I have different schools of thoughts yet no matter what we believe, what work works and everything has many causes and effects After all, it’s just a matter of opinions and realization …

      Like

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