Why we need to cut taxes for lower paid workers
In September, the Reserve Bank of Australia lowered its cash rate by 25 basis points to a new record low of 0.75 per cent. It was the third rate cut this year. The rate cuts aim to boost our economy and support employment. But I seriously doubt they will be enough, on their own, to stimulate growth. To my mind, it’s time to cut taxes for lower paid workers.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
xiao fang xu
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It should be One Law for all of us, including taxes, preferably below 10%
and reply to David on Velocity of Money:
Gary North:
one of many unsolved mysteries in economics. Economists are part-time verbal magicians, kind of like Harry Potter, except that they don’t have any power. They are master illusionists. Once in a while — very rarely — someone in the audience calls their bluff. Financial columnist Nathan Lewis did this on Jude Wanniski’s Polyconomics Website on August 2, 2001. He pointed out that economists for 250 years have clung to a concept of the velocity of money. (Actually, it goes back over 300 years: the economist William Petty.) This relationship was made famous in 1911 by a Yale University economist, Irving Fisher. He expressed it as an equation, MV = PT. This equation symbolizes a supposedly measurable real-world relationship: the relationship between the quantity of money and prices. MV = PT means the quantity of money times the velocity of money equals the price level times the number of transactions. It looks very scientific, but it’s mostly abracadabra.
Lewis writes:
Money: What is it? Base money? M2? M2+CDs? M3? M13? MZM?
Velocity: A totally unmeasurable unknowable residual mystery variable
Prices: What is it? A price index? Whose price index?
Transactions: What is it? GDP? GNP? Measured by whom?
In other words, MV=PT is an uncertainty multiplied by a mystery equivalent to the product of two academic abstractions.
Notions of “Prices” and “Transactions” become even more vague in a situation where the dollar is used all over the world. In fact, most dollar bills are apparently being used overseas, in dollarized countries, in black markets, as a secondary currency, in the international drug trade, by commodities producers, by tourists, and by foreign banks and central banks. These are all dollar transactions. Do the Ms take account of eurodollars, or deposits in Japanese banks? Do price indexes include prices of Middle East arms shipments, or Cambodian heroin or Columbian cocaine, or groceries in dollarized El Salvador?
Does GDP take into account dollar-denominated trades in the Russian black market?
Martin
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3.5% of 10.7 million would be only 0.37 million people, not 3.7 million
Roger Montgomery
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correct! Thanks for picking it up Martin.
David
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Totally agree. Raise the tax free level from AUD18,000 and this high velocity money will likely re-enter the economy where it will be spent, spent again, and again, at each transaction the government receives 10% GST. Everyone wins – especially those with lower incomes – but also businesses.
There’s a very good primer here on the velocity of money and why fast is good.
https://www.joshuakennon.com/the-velocity-of-money-for-beginners/
It describes how lowering taxes at high income levels does not work (creating asset bubbles) – while the converse (cutting income taxes for lower paid workers) does. It is criminal how cutting taxes on the rich so it will ‘trickle down’ has become the mantra in many circles. Cutting income tax should start at the lowest income levels first – in order to *increase the velocity* of money.
Everyone should understand this concept of the velocity of money. Roger’s right – cut taxes on lowest income earners.
Gillian Smith
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Roger,
Is your 3.5 per cent of 10.7 million employed people correct?
regards
gillian
Roger Montgomery
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From the ABS database.