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Does the flight of wealthy cause deflation?

ErenBalkir
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9/1/2015 6:42:04 PM
Posted: 1 year ago
One of the main arguments put forward about taxing the rich more is that they will just leave the country and take all their money with them. Now I actually think this is true, that many of the rich do leave and then put all their money in Monaco or whatever.

The reason I am still in favour of taxing the rich is that I don't think it matters. Nothing physical is leaving the country. Only electronic money (it could even apply to cash) on a computer being deleted in the UK and added in Monaco. This would take money out of circulation and cause (if my limited economics is up to par) deflation. The government can then just print money to replace it. Therefore I fail to see how this is a problem.

Am I right, does capital flight cause deflation and is it even an issue?
ResponsiblyIrresponsible
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9/1/2015 9:10:36 PM
Posted: 1 year ago
At 9/1/2015 6:42:04 PM, ErenBalkir wrote:
Am I right, does capital flight cause deflation and is it even an issue?

There are a few different mechanisms at place here, and I think calling excessive taxation "deflationary" in nature jumps the gun, though it depends heavily on several countervailing forces.

Let's consider, for instance, a giant tax hike: let's say we raise the corporate tax rate to 70%. For now, let's ignore where this lies on the so-called "Laffer Curve," though there may be some not-insignificant capital flight:

1. AS curve shifts to the left, meaning prices *rise* and output falls. If the curve is somewhat inelastic, that means prices adjust more rapidly so prices will rise by more than output falls. If the AS curve is elastic, output falls more than prices rise.

2. AD would probably shift to the left. Of course, AD is largely controlled by monetary policy, so it's very possible that the Fed would say, "Hey, Congress just passed a giant tax hike, causing us to cut our forecast for growth and employment. Let's consider easing policy to lean against this." The wrinkle to this is that obviously the supply-side effects will create a dilemma: the Fed wants to control prices and employment, and it does so pushing both in the same direction -- but, in this case, it would want to push employment up and prices down. So, again, that would depend on AS elasticity.

3. A permanent tax hike might impact the long-run aggregate supply curve, meaning that we're looking at a new lower benchmark for trend growth. Indeed, unemployment would tend to rise, but the "new normal" is much higher, so prices over time would tend to adjust upward.

4. So, in every aforementioned case, there's considerable upward pressure on prices, but then the question becomes, what if the tax rate is so unbelievably high that businesses physically *flee*? There are two possible effects: (1) competition completely tanks, so the few remaining firms can collude to jack up prices to compensate for the lack of capital investment in their firms and (2) demand completely tanks, which would push prices in the opposite direction -- maybe not outright deflation, but certainly disinflation.

The Fed would then, of course, react. But the problem is that the Fed can't physically drop money off a helicopter: it can play around with interest rates and adjust liquidity to encourage entrepreneurial activity, but obviously that's heavily contingent on economic actors behaving in predictable ways and assuming that economic activity is at least in some sense interest-rate sensitive (China, for instance, is less interest-rate sensitive because (a) it's transitioning to a more service-based economy and (b) a large portion of its economy is state-run). If all the investors peace out and run to, say, England, the size of financial markets completely tanks, assuming that the expectation or implementation of an "easy money" policy doesn't bring some or all of them back. The same would be the case for a money-financed budget deficit or tax cut: who's actually spending or investing that money? Again, productivity capacity -- insofar as the capital, labor stock, and productivity wane, as would likely happen in this case -- would tank.

5. The empirical case is a bit more subtle. Back to the point on elasticities: the elasticity is actually pretty low: the AS curve is somewhat flat due to a number of factor -- globalization, well-anchored inflation expectations, greater price rigidity, etc. So prices would tend to adjust fairly slowly, meaning that the bulk of the impact from a tax hike would probably be a loss of output, giving monetary policy considerable room to counteract the contractionary tax cut -- *and* because prices and wages are sticky, anyway, we wouldn't find ourselves in outright deflation, at least not immediately.

So, to answer your question, no, we probably wouldn't find ourselves in outright deflation, and it's very possible that investors wouldn't take their money and move elsewhere, but there could nevertheless be very dire effects for productive capacity which I think we ought to avoid, so I wouldn't recommend considerable tax hikes, especially with various demographic forces already threatening the economy's long-run productive capacity.
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ResponsiblyIrresponsible
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9/1/2015 9:20:02 PM
Posted: 1 year ago
So, I *think* that's how it would work, but I need to think this out a bit more, lol.

If you remind me in a bit, I'll draw the graphs out and see if I come up with the same outcome.
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ResponsiblyIrresponsible
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9/1/2015 9:28:17 PM
Posted: 1 year ago
Yup, there's no definitive answer to this.... lol...

Case A) Demand effects outweighs supply effect, LRAS static, prices adjust downward

Case B) Supply effect outweighs demand effect, LRAS static, prices adjust upward

Case C) Demand effect outweighs supply effect, but LRAS effect outweighs demand effect, prices adjust upward

Case D) Demand effect outweighs supply effect, but LRAS effect equals demand effect, prices don't move unless it bleeds over to expectations

Case E) Demand effect outweighs supply effect, and LRAS moves but not enough to equal the negative demand effect, prices adjust downward

Case F) Supply effect outweighs demand effect, and LRAS moves at all, upward pressure on prices

I could keep going, but in any case where the supply effect outweighs the demand effect, prices are going to rise, especially if we shift the benchmark (the LRAS).

So, by this litany of scenarios, that would suggest prices would *rise*, barring some crazy price rigidity and/or monetary offset. The problem is.... that's what my last post implied, lol...
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ErenBalkir
Posts: 157
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9/1/2015 9:55:45 PM
Posted: 1 year ago
At 9/1/2015 9:10:36 PM, ResponsiblyIrresponsible wrote:
At 9/1/2015 6:42:04 PM, ErenBalkir wrote:
Am I right, does capital flight cause deflation and is it even an issue?

There are a few different mechanisms at place here, and I think calling excessive taxation "deflationary" in nature jumps the gun, though it depends heavily on several countervailing forces.

Let's consider, for instance, a giant tax hike: let's say we raise the corporate tax rate to 70%. For now, let's ignore where this lies on the so-called "Laffer Curve," though there may be some not-insignificant capital flight:

1. AS curve shifts to the left, meaning prices *rise* and output falls. If the curve is somewhat inelastic, that means prices adjust more rapidly so prices will rise by more than output falls. If the AS curve is elastic, output falls more than prices rise.

2. AD would probably shift to the left. Of course, AD is largely controlled by monetary policy, so it's very possible that the Fed would say, "Hey, Congress just passed a giant tax hike, causing us to cut our forecast for growth and employment. Let's consider easing policy to lean against this." The wrinkle to this is that obviously the supply-side effects will create a dilemma: the Fed wants to control prices and employment, and it does so pushing both in the same direction -- but, in this case, it would want to push employment up and prices down. So, again, that would depend on AS elasticity.

3. A permanent tax hike might impact the long-run aggregate supply curve, meaning that we're looking at a new lower benchmark for trend growth. Indeed, unemployment would tend to rise, but the "new normal" is much higher, so prices over time would tend to adjust upward.

4. So, in every aforementioned case, there's considerable upward pressure on prices, but then the question becomes, what if the tax rate is so unbelievably high that businesses physically *flee*? There are two possible effects: (1) competition completely tanks, so the few remaining firms can collude to jack up prices to compensate for the lack of capital investment in their firms and (2) demand completely tanks, which would push prices in the opposite direction -- maybe not outright deflation, but certainly disinflation.

The Fed would then, of course, react. But the problem is that the Fed can't physically drop money off a helicopter: it can play around with interest rates and adjust liquidity to encourage entrepreneurial activity, but obviously that's heavily contingent on economic actors behaving in predictable ways and assuming that economic activity is at least in some sense interest-rate sensitive (China, for instance, is less interest-rate sensitive because (a) it's transitioning to a more service-based economy and (b) a large portion of its economy is state-run). If all the investors peace out and run to, say, England, the size of financial markets completely tanks, assuming that the expectation or implementation of an "easy money" policy doesn't bring some or all of them back. The same would be the case for a money-financed budget deficit or tax cut: who's actually spending or investing that money? Again, productivity capacity -- insofar as the capital, labor stock, and productivity wane, as would likely happen in this case -- would tank.

5. The empirical case is a bit more subtle. Back to the point on elasticities: the elasticity is actually pretty low: the AS curve is somewhat flat due to a number of factor -- globalization, well-anchored inflation expectations, greater price rigidity, etc. So prices would tend to adjust fairly slowly, meaning that the bulk of the impact from a tax hike would probably be a loss of output, giving monetary policy considerable room to counteract the contractionary tax cut -- *and* because prices and wages are sticky, anyway, we wouldn't find ourselves in outright deflation, at least not immediately.

So, to answer your question, no, we probably wouldn't find ourselves in outright deflation, and it's very possible that investors wouldn't take their money and move elsewhere, but there could nevertheless be very dire effects for productive capacity which I think we ought to avoid, so I wouldn't recommend considerable tax hikes, especially with various demographic forces already threatening the economy's long-run productive capacity.

I can sort of understand all of that. If you tax businesses more, prices will rise. My question was not about businesses.

What if there was a wealth tax or a higher income tax on the rich. Would that cause any deflation or inflation? (Assuming they paid it)

The second part (the question I really want to know about ) is about if they don't pay it. If rich individuals leave the country, is that a bad thing? Would it bring money out of circulation and cause deflation. Would there be any real loss to the economy?

I ask because a lot of those against raising taxes say the rich will leave the country and we will not get any tax. My idea (that I am unsure about) is that it doesn't matter. Nothing is physically taken out of the economy and the money that is moved abroad will stop circulating, causing inflation to fall. The government can then print the same amount of money that left the country to keep inflation steady. Therefore no loss to the economy.

Am I right?

Real dedication by the way, doing all that work just for me!
ErenBalkir
Posts: 157
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9/1/2015 10:06:13 PM
Posted: 1 year ago
At 9/1/2015 9:10:36 PM, ResponsiblyIrresponsible wrote:
At 9/1/2015 6:42:04 PM, ErenBalkir wrote:
Am I right, does capital flight cause deflation and is it even an issue?

There are a few different mechanisms at place here, and I think calling excessive taxation "deflationary" in nature jumps the gun, though it depends heavily on several countervailing forces.

Let's consider, for instance, a giant tax hike: let's say we raise the corporate tax rate to 70%. For now, let's ignore where this lies on the so-called "Laffer Curve," though there may be some not-insignificant capital flight:

1. AS curve shifts to the left, meaning prices *rise* and output falls. If the curve is somewhat inelastic, that means prices adjust more rapidly so prices will rise by more than output falls. If the AS curve is elastic, output falls more than prices rise.

2. AD would probably shift to the left. Of course, AD is largely controlled by monetary policy, so it's very possible that the Fed would say, "Hey, Congress just passed a giant tax hike, causing us to cut our forecast for growth and employment. Let's consider easing policy to lean against this." The wrinkle to this is that obviously the supply-side effects will create a dilemma: the Fed wants to control prices and employment, and it does so pushing both in the same direction -- but, in this case, it would want to push employment up and prices down. So, again, that would depend on AS elasticity.

3. A permanent tax hike might impact the long-run aggregate supply curve, meaning that we're looking at a new lower benchmark for trend growth. Indeed, unemployment would tend to rise, but the "new normal" is much higher, so prices over time would tend to adjust upward.

4. So, in every aforementioned case, there's considerable upward pressure on prices, but then the question becomes, what if the tax rate is so unbelievably high that businesses physically *flee*? There are two possible effects: (1) competition completely tanks, so the few remaining firms can collude to jack up prices to compensate for the lack of capital investment in their firms and (2) demand completely tanks, which would push prices in the opposite direction -- maybe not outright deflation, but certainly disinflation.

The Fed would then, of course, react. But the problem is that the Fed can't physically drop money off a helicopter: it can play around with interest rates and adjust liquidity to encourage entrepreneurial activity, but obviously that's heavily contingent on economic actors behaving in predictable ways and assuming that economic activity is at least in some sense interest-rate sensitive (China, for instance, is less interest-rate sensitive because (a) it's transitioning to a more service-based economy and (b) a large portion of its economy is state-run). If all the investors peace out and run to, say, England, the size of financial markets completely tanks, assuming that the expectation or implementation of an "easy money" policy doesn't bring some or all of them back. The same would be the case for a money-financed budget deficit or tax cut: who's actually spending or investing that money? Again, productivity capacity -- insofar as the capital, labor stock, and productivity wane, as would likely happen in this case -- would tank.

5. The empirical case is a bit more subtle. Back to the point on elasticities: the elasticity is actually pretty low: the AS curve is somewhat flat due to a number of factor -- globalization, well-anchored inflation expectations, greater price rigidity, etc. So prices would tend to adjust fairly slowly, meaning that the bulk of the impact from a tax hike would probably be a loss of output, giving monetary policy considerable room to counteract the contractionary tax cut -- *and* because prices and wages are sticky, anyway, we wouldn't find ourselves in outright deflation, at least not immediately.

So, to answer your question, no, we probably wouldn't find ourselves in outright deflation, and it's very possible that investors wouldn't take their money and move elsewhere, but there could nevertheless be very dire effects for productive capacity which I think we ought to avoid, so I wouldn't recommend considerable tax hikes, especially with various demographic forces already threatening the economy's long-run productive capacity.

I Just re-read it. Your fourth point is the one I was looking for but instead of business tax hikes (which would cause unemployment and lack of investment as you say), I was wondering about individual income or wealth tax increases. There effect on inflation if paid and the effect of the rich individuals leaving with their money in order to avoid paying the tax on inflation as well.

Again thanks in advance
ResponsiblyIrresponsible
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9/1/2015 10:15:11 PM
Posted: 1 year ago
At 9/1/2015 9:55:45 PM, ErenBalkir wrote:
I can sort of understand all of that. If you tax businesses more, prices will rise. My question was not about businesses.

I mean, it's a bit more complex than that, but sure, that might happen. I don't understand how could remove businesses from the equation: even if we just taxed labor income more, you'd see the exact same effect as people cut back hours, work effort, etc. and productivity wane. The question isn't whether there are channels through which prices rise; it's a question of *how much* and *how quickly.* I.e., will output fall instead? That's the conundrum.

What if there was a wealth tax or a higher income tax on the rich. Would that cause any deflation or inflation? (Assuming they paid it)

The effects would be nearly identical as the ones I've described above, especially because many businesses pay taxes as individuals -- and, in many cases, this would constitute a double tax.

The second part (the question I really want to know about ) is about if they don't pay it. If rich individuals leave the country, is that a bad thing? Would it bring money out of circulation and cause deflation. Would there be any real loss to the economy?

That's what I tried to explain. If they left the country, there are several possible channels through which that could impact prices: demand falls, supply falls (less competition, less investment, less productivity), and productive capacity falls. The problem is, two of these effects push up on prices and one pushes down. I can't tell you for certain whether it would cause deflation, especially since I don't know the elasticities or the Fed's reaction function which is largely contingent on those elasticities. There are several possible scenarios, but hardly any definitive proof.

So, this is one of those classic "on one hand, on the other hand" cases.

I ask because a lot of those against raising taxes say the rich will leave the country and we will not get any tax. My idea (that I am unsure about) is that it doesn't matter. Nothing is physically taken out of the economy and the money that is moved abroad will stop circulating, causing inflation to fall. The government can then print the same amount of money that left the country to keep inflation steady. Therefore no loss to the economy.

Am I right?

No, I don't think so. The inflation story is a bit more complex, but the government can't really just "print money" to cover a significant loss of capital investment, especially if there are no economic actors to readily *drive* that investment, *and* this needs to take into account that (a) we don't live in a ceteris-paribus world, so a policy like that or even the expectation of a policy like that might drive people back into the country and (b) velocity might fall if there are fewer economic actors actively spending money.

I mean, the channel through which the Treasury could "print money" is either injecting it into banks to make loans -- the Fed can do this, too -- or funding purchases. The former requires entrepreneurs to actually do something productive with that money, and the latter requires consumers to spend and for their business counterparts to react accordingly. The problem is, via any basic consumption loan-model, the massive cost to the population would actually *increase* the amount of consumption necessary to sustain full employment, and again productive capacity would tank. Not to mention, there would be vicious displacement costs that would likely undermine the economy's long-run capacity further.

So, yes, it is a problem if the richest people were to run overseas.

Real dedication by the way, doing all that work just for me!
~ResponsiblyIrresponsible

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ResponsiblyIrresponsible
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9/1/2015 10:17:00 PM
Posted: 1 year ago
At 9/1/2015 10:06:13 PM, ErenBalkir wrote:
At 9/1/2015 9:10:36 PM, ResponsiblyIrresponsible wrote:
At 9/1/2015 6:42:04 PM, ErenBalkir wrote:
Am I right, does capital flight cause deflation and is it even an issue?

There are a few different mechanisms at place here, and I think calling excessive taxation "deflationary" in nature jumps the gun, though it depends heavily on several countervailing forces.

Let's consider, for instance, a giant tax hike: let's say we raise the corporate tax rate to 70%. For now, let's ignore where this lies on the so-called "Laffer Curve," though there may be some not-insignificant capital flight:

1. AS curve shifts to the left, meaning prices *rise* and output falls. If the curve is somewhat inelastic, that means prices adjust more rapidly so prices will rise by more than output falls. If the AS curve is elastic, output falls more than prices rise.

2. AD would probably shift to the left. Of course, AD is largely controlled by monetary policy, so it's very possible that the Fed would say, "Hey, Congress just passed a giant tax hike, causing us to cut our forecast for growth and employment. Let's consider easing policy to lean against this." The wrinkle to this is that obviously the supply-side effects will create a dilemma: the Fed wants to control prices and employment, and it does so pushing both in the same direction -- but, in this case, it would want to push employment up and prices down. So, again, that would depend on AS elasticity.

3. A permanent tax hike might impact the long-run aggregate supply curve, meaning that we're looking at a new lower benchmark for trend growth. Indeed, unemployment would tend to rise, but the "new normal" is much higher, so prices over time would tend to adjust upward.

4. So, in every aforementioned case, there's considerable upward pressure on prices, but then the question becomes, what if the tax rate is so unbelievably high that businesses physically *flee*? There are two possible effects: (1) competition completely tanks, so the few remaining firms can collude to jack up prices to compensate for the lack of capital investment in their firms and (2) demand completely tanks, which would push prices in the opposite direction -- maybe not outright deflation, but certainly disinflation.

The Fed would then, of course, react. But the problem is that the Fed can't physically drop money off a helicopter: it can play around with interest rates and adjust liquidity to encourage entrepreneurial activity, but obviously that's heavily contingent on economic actors behaving in predictable ways and assuming that economic activity is at least in some sense interest-rate sensitive (China, for instance, is less interest-rate sensitive because (a) it's transitioning to a more service-based economy and (b) a large portion of its economy is state-run). If all the investors peace out and run to, say, England, the size of financial markets completely tanks, assuming that the expectation or implementation of an "easy money" policy doesn't bring some or all of them back. The same would be the case for a money-financed budget deficit or tax cut: who's actually spending or investing that money? Again, productivity capacity -- insofar as the capital, labor stock, and productivity wane, as would likely happen in this case -- would tank.

5. The empirical case is a bit more subtle. Back to the point on elasticities: the elasticity is actually pretty low: the AS curve is somewhat flat due to a number of factor -- globalization, well-anchored inflation expectations, greater price rigidity, etc. So prices would tend to adjust fairly slowly, meaning that the bulk of the impact from a tax hike would probably be a loss of output, giving monetary policy considerable room to counteract the contractionary tax cut -- *and* because prices and wages are sticky, anyway, we wouldn't find ourselves in outright deflation, at least not immediately.

So, to answer your question, no, we probably wouldn't find ourselves in outright deflation, and it's very possible that investors wouldn't take their money and move elsewhere, but there could nevertheless be very dire effects for productive capacity which I think we ought to avoid, so I wouldn't recommend considerable tax hikes, especially with various demographic forces already threatening the economy's long-run productive capacity.

I Just re-read it. Your fourth point is the one I was looking for but instead of business tax hikes (which would cause unemployment and lack of investment as you say), I was wondering about individual income or wealth tax increases. There effect on inflation if paid and the effect of the rich individuals leaving with their money in order to avoid paying the tax on inflation as well.

Again thanks in advance

Again, it would be the exact same effect because a lot of businesses file a pass-through entities. A wealth tax would probably discourage investment in, say, stocks, and because of the double-taxation nature of the corporate tax, even high labor income taxes would probably bear negatively on investment.
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ErenBalkir
Posts: 157
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9/1/2015 10:27:58 PM
Posted: 1 year ago
At 9/1/2015 10:15:11 PM, ResponsiblyIrresponsible wrote:
At 9/1/2015 9:55:45 PM, ErenBalkir wrote:
I can sort of understand all of that. If you tax businesses more, prices will rise. My question was not about businesses.

I mean, it's a bit more complex than that, but sure, that might happen. I don't understand how could remove businesses from the equation: even if we just taxed labor income more, you'd see the exact same effect as people cut back hours, work effort, etc. and productivity wane. The question isn't whether there are channels through which prices rise; it's a question of *how much* and *how quickly.* I.e., will output fall instead? That's the conundrum.

What if there was a wealth tax or a higher income tax on the rich. Would that cause any deflation or inflation? (Assuming they paid it)

The effects would be nearly identical as the ones I've described above, especially because many businesses pay taxes as individuals -- and, in many cases, this would constitute a double tax.

The second part (the question I really want to know about ) is about if they don't pay it. If rich individuals leave the country, is that a bad thing? Would it bring money out of circulation and cause deflation. Would there be any real loss to the economy?

That's what I tried to explain. If they left the country, there are several possible channels through which that could impact prices: demand falls, supply falls (less competition, less investment, less productivity), and productive capacity falls. The problem is, two of these effects push up on prices and one pushes down. I can't tell you for certain whether it would cause deflation, especially since I don't know the elasticities or the Fed's reaction function which is largely contingent on those elasticities. There are several possible scenarios, but hardly any definitive proof.

So, this is one of those classic "on one hand, on the other hand" cases.

I ask because a lot of those against raising taxes say the rich will leave the country and we will not get any tax. My idea (that I am unsure about) is that it doesn't matter. Nothing is physically taken out of the economy and the money that is moved abroad will stop circulating, causing inflation to fall. The government can then print the same amount of money that left the country to keep inflation steady. Therefore no loss to the economy.

Am I right?

No, I don't think so. The inflation story is a bit more complex, but the government can't really just "print money" to cover a significant loss of capital investment, especially if there are no economic actors to readily *drive* that investment, *and* this needs to take into account that (a) we don't live in a ceteris-paribus world, so a policy like that or even the expectation of a policy like that might drive people back into the country and (b) velocity might fall if there are fewer economic actors actively spending money.

I mean, the channel through which the Treasury could "print money" is either injecting it into banks to make loans -- the Fed can do this, too -- or funding purchases. The former requires entrepreneurs to actually do something productive with that money, and the latter requires consumers to spend and for their business counterparts to react accordingly. The problem is, via any basic consumption loan-model, the massive cost to the population would actually *increase* the amount of consumption necessary to sustain full employment, and again productive capacity would tank. Not to mention, there would be vicious displacement costs that would likely undermine the economy's long-run capacity further.

So, yes, it is a problem if the richest people were to run overseas.


Real dedication by the way, doing all that work just for me!

Its late in the UK so this will be my last response. I will follow it up with a lot more questions later (so much detail! lol) but thanks for the detailed answers.

So the downside, you say, is less investment in the stock market and less entrepreneurs? I don't see that as being too bad (the stock market is essentially a betting market and i will not miss losing a few "entrepreneurs") . Any other downsides I'm missing?

I will follow it up with more tomorrow, thanks.
ResponsiblyIrresponsible
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9/1/2015 10:38:45 PM
Posted: 1 year ago
At 9/1/2015 10:27:58 PM, ErenBalkir wrote:
At 9/1/2015 10:15:11 PM, ResponsiblyIrresponsible wrote:
At 9/1/2015 9:55:45 PM, ErenBalkir wrote:
I can sort of understand all of that. If you tax businesses more, prices will rise. My question was not about businesses.

I mean, it's a bit more complex than that, but sure, that might happen. I don't understand how could remove businesses from the equation: even if we just taxed labor income more, you'd see the exact same effect as people cut back hours, work effort, etc. and productivity wane. The question isn't whether there are channels through which prices rise; it's a question of *how much* and *how quickly.* I.e., will output fall instead? That's the conundrum.

What if there was a wealth tax or a higher income tax on the rich. Would that cause any deflation or inflation? (Assuming they paid it)

The effects would be nearly identical as the ones I've described above, especially because many businesses pay taxes as individuals -- and, in many cases, this would constitute a double tax.

The second part (the question I really want to know about ) is about if they don't pay it. If rich individuals leave the country, is that a bad thing? Would it bring money out of circulation and cause deflation. Would there be any real loss to the economy?

That's what I tried to explain. If they left the country, there are several possible channels through which that could impact prices: demand falls, supply falls (less competition, less investment, less productivity), and productive capacity falls. The problem is, two of these effects push up on prices and one pushes down. I can't tell you for certain whether it would cause deflation, especially since I don't know the elasticities or the Fed's reaction function which is largely contingent on those elasticities. There are several possible scenarios, but hardly any definitive proof.

So, this is one of those classic "on one hand, on the other hand" cases.

I ask because a lot of those against raising taxes say the rich will leave the country and we will not get any tax. My idea (that I am unsure about) is that it doesn't matter. Nothing is physically taken out of the economy and the money that is moved abroad will stop circulating, causing inflation to fall. The government can then print the same amount of money that left the country to keep inflation steady. Therefore no loss to the economy.

Am I right?

No, I don't think so. The inflation story is a bit more complex, but the government can't really just "print money" to cover a significant loss of capital investment, especially if there are no economic actors to readily *drive* that investment, *and* this needs to take into account that (a) we don't live in a ceteris-paribus world, so a policy like that or even the expectation of a policy like that might drive people back into the country and (b) velocity might fall if there are fewer economic actors actively spending money.

I mean, the channel through which the Treasury could "print money" is either injecting it into banks to make loans -- the Fed can do this, too -- or funding purchases. The former requires entrepreneurs to actually do something productive with that money, and the latter requires consumers to spend and for their business counterparts to react accordingly. The problem is, via any basic consumption loan-model, the massive cost to the population would actually *increase* the amount of consumption necessary to sustain full employment, and again productive capacity would tank. Not to mention, there would be vicious displacement costs that would likely undermine the economy's long-run capacity further.

So, yes, it is a problem if the richest people were to run overseas.


Real dedication by the way, doing all that work just for me!

Its late in the UK so this will be my last response. I will follow it up with a lot more questions later (so much detail! lol) but thanks for the detailed answers.

So the downside, you say, is less investment in the stock market and less entrepreneurs? I don't see that as being too bad (the stock market is essentially a betting market and i will not miss losing a few "entrepreneurs") . Any other downsides I'm missing?

Not necessarily just stock market investment, but less overall investment (particularly if you raise capital gains taxes) and less consumption. You may also see asset values -- not only stocks, but also homes -- plummet, which would generate a negative wealth effect, and thus exacerbate those losses.

Of course, that's selectively ceteris-paribus, lol..

I will follow it up with more tomorrow, thanks.
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ax123man
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9/1/2015 11:40:34 PM
Posted: 1 year ago
I can't possibly cover this to the level RI can, but if you tax something, you get less of it. I'm not sure we want less of what the rich provide. If they change their behavior due to the tax (which may mean leaving the country but most likely will be some other change of behavior), then can't we assume that the most likely outcome is not good for either themselves or the businesses they are involved in? After all, their unfettered behavior made them wealthy, which means they were able to improve the lives of consumers (assuming they did not get that way only thru inheritance or via political means). If you restrict that, then outcomes will be diminished. The only way I can around this is to assume that their behavior will become more optimal with taxes increased, which would seem odd.
ErenBalkir
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9/2/2015 2:22:43 PM
Posted: 1 year ago
That's what I tried to explain. If they left the country, there are several possible channels through which that could impact prices: demand falls, supply falls (less competition, less investment, less productivity), and productive capacity falls. The problem is, two of these effects push up on prices and one pushes down. I can't tell you for certain whether it would cause deflation, especially since I don't know the elasticities or the Fed's reaction function which is largely contingent on those elasticities. There are several possible scenarios, but hardly any definitive proof.

Here is where I have a disagreement. You say that there would be less competition, less investment, less productivity and less productive capacity if income tax/ wealth tax on the super rich is put in place. Why? If, lets say 1000 rich individuals decided to leave the country so that they could pay less tax elsewhere, what would physically change? Many of those rich individuals will keep on investing in the country.

Think of it like this. A person standing on the border between France and Switzerland has a brief case of paper with "money" written on it - a from of paper currency. He now steps across the border into Switzerland. What real wealth has left the country? why is it that output, investment, and competition must fall because a brief case has moved!! Do you vaguely understand my question?

So fundamentally, why is it that it would cause "less competition, less investment, less productivity and less productive capacity".
ResponsiblyIrresponsible
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9/2/2015 3:13:38 PM
Posted: 1 year ago
At 9/2/2015 2:22:43 PM, ErenBalkir wrote:
Here is where I have a disagreement. You say that there would be less competition, less investment, less productivity and less productive capacity if income tax/ wealth tax on the super rich is put in place. Why? If, lets say 1000 rich individuals decided to leave the country so that they could pay less tax elsewhere, what would physically change? Many of those rich individuals will keep on investing in the country.

Thy might still invest, but only financial investments. The kind of investment I'm talking about which actually drives growth is physical investment -- plant and equipment -- and that's actually associated with having a business and setting up shop here. Obviously if they flee the U.S., they're not investing *physically* in American companies, so that yields all the negative effects I described.

Think of it like this. A person standing on the border between France and Switzerland has a brief case of paper with "money" written on it - a from of paper currency. He now steps across the border into Switzerland. What real wealth has left the country? why is it that output, investment, and competition must fall because a brief case has moved!! Do you vaguely understand my question?

Of course I understand your question, and the insinuation that I don't -- after I addressed it in as much as depth as I did, though clearly that amount of depth is lost upon you, because you want to focus on financial investment -- is stupid and offensive.

We're not just talking about financial investment. If you jacked up labor income, it's possible that people who still invested in the stock market or in corporate bonds would invest in America. The problem is, raising taxes on labor income would also reduce *physical* investment by firms, which would reduce productivity, which would depress returns in the United States, which would make U.S. companies far less attractive to invest in. I think with foreign direct investment, they would pay capital gains taxes from their native countries, but there would still be spillovers into their returns.

Again, there's no free lunch.

So fundamentally, why is it that it would cause "less competition, less investment, less productivity and less productive capacity".

Because you're physically driving businesses -- not just financial investors -- overseas and disincentivizing physical investment at home, which makes investment in American companies less attractive and depresses return. Some companies would go out of business, eroding competition, and the remainder would probably jack up their costs. Capital investment would invariable fall, which depresses productivity, and insofar as the tax hike was permanent, productive capacity would fall.

I don't know how many ways I can explain this same point.
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ErenBalkir
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9/2/2015 3:48:05 PM
Posted: 1 year ago
At 9/2/2015 3:13:38 PM, ResponsiblyIrresponsible wrote:
At 9/2/2015 2:22:43 PM, ErenBalkir wrote:
Here is where I have a disagreement. You say that there would be less competition, less investment, less productivity and less productive capacity if income tax/ wealth tax on the super rich is put in place. Why? If, lets say 1000 rich individuals decided to leave the country so that they could pay less tax elsewhere, what would physically change? Many of those rich individuals will keep on investing in the country.

Thy might still invest, but only financial investments. The kind of investment I'm talking about which actually drives growth is physical investment -- plant and equipment -- and that's actually associated with having a business and setting up shop here. Obviously if they flee the U.S., they're not investing *physically* in American companies, so that yields all the negative effects I described.

Think of it like this. A person standing on the border between France and Switzerland has a brief case of paper with "money" written on it - a from of paper currency. He now steps across the border into Switzerland. What real wealth has left the country? why is it that output, investment, and competition must fall because a brief case has moved!! Do you vaguely understand my question?

Of course I understand your question, and the insinuation that I don't -- after I addressed it in as much as depth as I did, though clearly that amount of depth is lost upon you, because you want to focus on financial investment -- is stupid and offensive.

We're not just talking about financial investment. If you jacked up labor income, it's possible that people who still invested in the stock market or in corporate bonds would invest in America. The problem is, raising taxes on labor income would also reduce *physical* investment by firms, which would reduce productivity, which would depress returns in the United States, which would make U.S. companies far less attractive to invest in. I think with foreign direct investment, they would pay capital gains taxes from their native countries, but there would still be spillovers into their returns.

Again, there's no free lunch.

So fundamentally, why is it that it would cause "less competition, less investment, less productivity and less productive capacity".

Because you're physically driving businesses -- not just financial investors -- overseas and disincentivizing physical investment at home, which makes investment in American companies less attractive and depresses return. Some companies would go out of business, eroding competition, and the remainder would probably jack up their costs. Capital investment would invariable fall, which depresses productivity, and insofar as the tax hike was permanent, productive capacity would fall.

I don't know how many ways I can explain this same point.

So, I apologize if I sounded rude. I did not mean to insult you. I hope you will be able to bear with me as my questions are obviously poorly asked and I am
mis-communicating with you. I think I have been leading you to answers i didn't want and blaming you for answering them.

From what I can make out, you think that if money goes abroad, less more money will be invested here in business. This will mean there is less output will be produced. This I understand and it seems at first logical.

But...

The scenario of a brief case moving from one country to the other is still relevant. For me, it raises the issue of money and what it represents. If money (that is supposed to represent labour and resources) moves to another country, then it would appear that actual reasources and labour have moved to another country. This is obviously not true. No resources are being moved. Therefore what is that changes?

If gold is used as another currency and an investor has gold, he will use it to purchase labor and resources with which to invest (assuming both are within the country). If that investor takes his gold to the other side of the world, then he will purchase labor and resources with which to invest in a completely different country. The problem it seems is that no labor and resources has moved between the two countries, only gold. No workers have migrated and no raw materials have been exchanged. Therefore why is the first country worse off? It can instead just put those labor and resources to work without the need for rocks or pieces of paper. (Or alternatively create more paper or electronic money and use it to put those unused resources and labour to work)

Therefore, why is rocks (Gold), paper or electronic money needed in order to invest?

I really hope you will show patience and answer - God knows you've done enough already!
ResponsiblyIrresponsible
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9/2/2015 4:02:18 PM
Posted: 1 year ago
At 9/2/2015 3:48:05 PM, ErenBalkir wrote:
So, I apologize if I sounded rude. I did not mean to insult you. I hope you will be able to bear with me as my questions are obviously poorly asked and I am
mis-communicating with you. I think I have been leading you to answers i didn't want and blaming you for answering them.

No problem. I feel as though I've answered all your questions, and that these tax rates you're discussing are far more interconnected than you might thing. The point is tax incidence: who actually bears the burden of that tax? Investors investing in financial assets might actually feel the burn from a labor income tax. It's all connected, hence the phrase "there's no such thing as a free lunch."

From what I can make out, you think that if money goes abroad, less more money will be invested here in business. This will mean there is less output will be produced. This I understand and it seems at first logical.

It depends, of course, on why that money went abroad. Is it because of high cap gains taxes? Low returns on stocks, driven by cumbersome labor income tax rates? Both cases would induce capital flight, as other countries would become significantly better investments. Businesses also might move overseas, taking with them any financial investment that otherwise would have been associated with the.

But...

The scenario of a brief case moving from one country to the other is still relevant. For me, it raises the issue of money and what it represents. If money (that is supposed to represent labour and resources) moves to another country, then it would appear that actual reasources and labour have moved to another country. This is obviously not true. No resources are being moved. Therefore what is that changes?

It isn't solely brief cases. Those brief cases represent the labor stock, though it might be the case that these are solely institutional investors. That notwithstanding, they still spend money and still seek productive outlets. If they're not spending money to consume stuff in the US, everyone else needs to pick up the slack -- and that includes in tax receipts, which is another social (either spending cuts or tax hikes) that this might depress growth.

But this isn't solely institutional investors moving overseas. Physical businesses *and* the investors who would've invested in those businesses might move overseas.

If gold is used as another currency and an investor has gold, he will use it to purchase labor and resources with which to invest (assuming both are within the country).

Following you so far.

If that investor takes his gold to the other side of the world, then he will purchase labor and resources with which to invest in a completely different country.

Still following.

The problem it seems is that no labor and resources has moved between the two countries, only gold.

But that's just not true, because that gold represents capital -- an asset used by the firms in which it was invested to expand. Even if those investors or the physical businesses didn't physically flock overseas, in which case we'd have the negative consumption effects I highlighted earlier, there's still less capital formation here, and again other people would need to pick up the tab.

No workers have migrated and no raw materials have been exchanged.

Raw materials is sort of an indirect notion, though it's possible that investment in raw materials might be capitalized by foreign companies which actually *have* capital, or that they could bid up the price due to much higher investment demand than U.S. companies could readily sustain.

If Chinese companies became the hot thing, for instance, and stock returns in the U.S. tanked -- assuming China's economy didn't completely suck, as it does now -- then commodity prices would soar. That represents higher input costs for American businesses, a.k.a, a negative aggregate supply shock.

And I think it's weak assumption to say that *no* workers would migrate. Surely there's a tax rate would businesses would choose to move elsewhere.

Therefore why is the first country worse off? It can instead just put those labor and resources to work without the need for rocks or pieces of paper. (Or alternatively create more paper or electronic money and use it to put those unused resources and labour to work)

I've already explained why they can't just "create more paper" to put those resources to work. If we physically "printed paper" tomorrow without the goods to back it up, we'd have hyperinflation like you wouldn't believe. The reason we *don't* have inflation after "printing", aside from the technicalities related to velocity and etc., is because we have physical production amongst which that money can be spread. You'd want to print money, and then throw it... where? There's no productive investors left willing to capitalize on it and put it to productive use. It'll compound the supply shock.

And, again, many labor and resources *will* leave the country. I don't know how many other ways I can emphasize this. It's not merely changes in financial investment that we're looking at.

Therefore, why is rocks (Gold), paper or electronic money needed in order to invest?

I'm not even sure what you're getting at here. Obviously money is needed for investment, but the moving part is some productive venture. Those would disintegrate under higher taxes.
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ErenBalkir
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9/2/2015 5:11:16 PM
Posted: 1 year ago
This is a loooooooong reply. I think I have said everything I can say in this reply so have fun trying to understand my gibberish.

It depends, of course, on why that money went abroad. Is it because of high cap gains taxes? Low returns on stocks, driven by cumbersome labor income tax rates? Both cases would induce capital flight, as other countries would become significantly better investments. Businesses also might move overseas, taking with them any financial investment that otherwise would have been associated with the.

Assume that capital gains taxes stay the same. Assume that the return on investments generally stay the same. Also assume that labour tax rates stay the same except for the very wealthiest (VERY wealthy) which rises as the top rate of tax rises. (or even just a crackdown on tax avoidance) . This causes a small degree of capital flight. With those conditions, I will continue.

It isn't solely brief cases. Those brief cases represent the labor stock, though it might be the case that these are solely institutional investors. That notwithstanding, they still spend money and still seek productive outlets. If they're not spending money to consume stuff in the US, everyone else needs to pick up the slack -- and that includes in tax receipts, which is another social (either spending cuts or tax hikes) that this might depress growth.

Why is it that " if they're not spending money to consume stuff in the US, everyone else needs to pick up the slack" . What has left the country that now means people have to work more, produce more and government tax receipts fall? Paper? What would be wrong if, when the guy with a brief case full of paper left, we just gave another guy a suitcase full of paper to "replace him". This is in essence what I mean by "printing money". If that suitcase is essential to invest then make another if it leaves. If it isn't essential to invest, then why does it matter if he left or not?

But that's just not true, because that gold represents capital -- an asset used by the firms in which it was invested to expand. Even if those investors or the physical businesses didn't physically flock overseas, in which case we'd have the negative consumption effects I highlighted earlier, there's still less capital formation here, and again other people would need to pick up the tab.

Why is there "less capital formation here"? Why would fewer factories and equipment be built if a lump of gold left the country? I know that gold "represents" capital, but it isn't in its self capital. If someone dropped the gold down a well, there wouldn't be fewer factories or equipment. The same is true for paper money - if I burn paper money, the country as a whole isn't worse off?

Raw materials is sort of an indirect notion, though it's possible that investment in raw materials might be capitalized by foreign companies which actually *have* capital, or that they could bid up the price due to much higher investment demand than U.S. companies could readily sustain.

If Chinese companies became the hot thing, for instance, and stock returns in the U.S. tanked -- assuming China's economy didn't completely suck, as it does now -- then commodity prices would soar. That represents higher input costs for American businesses, a.k.a, a negative aggregate supply shock.

And I think it's weak assumption to say that *no* workers would migrate. Surely there's a tax rate would businesses would choose to move elsewhere.


So, you are saying that if returns on stocks in china rise and in america fall, commodity prices will rise. American business will have to pay more for imports. First, I don't understand the first paragraph and so don't know why that would happen. Second, How was this all caused by capital flight from the US (assuming my hypothetical upper income tax increase for the super wealthy).

I've already explained why they can't just "create more paper" to put those resources to work. If we physically "printed paper" tomorrow without the goods to back it up, we'd have hyperinflation like you wouldn't believe. The reason we *don't* have inflation after "printing", aside from the technicalities related to velocity and etc., is because we have physical production amongst which that money can be spread. You'd want to print money, and then throw it... where? There's no productive investors left willing to capitalize on it and put it to productive use. It'll compound the supply shock.

My idea about printing money is based on the idea that if money is taken out of circulation in a country, there will be a little deflation and so government would create money to cause a small amount of inflation to keep inflation steady. That to me seems reasonable. Then the question is, will there really be deflation. I think so. Especially because the inflationary examples you gave like "competition completely tanks, so the few remaining firms can collude to jack up prices to compensate for the lack of capital investment in their firms" doesn't seem realistic and all these were based anyway on tax hikes across the board, not on a very small number of super wealthy individuals.

I would also like to say that, if a bag of dollars is stuffed under the sofa, that will mean money is out of circulation and will cause deflation. Is this not similar to money leaving the country?

And, again, many labor and resources *will* leave the country. I don't know how many other ways I can emphasize this. It's not merely changes in financial investment that we're looking at.

Can you give me examples of real resources physically leaving the country as a result of capital flight ( not businesses but individuals leaving) ? If you've already mentioned one, I must of missed it. Sorry.

I'm not even sure what you're getting at here. Obviously money is needed for investment, but the moving part is some productive venture. Those would disintegrate under higher taxes.

"Obviously money is needed for investment," - yes, I understand that but the money itself is not what is needed but the resources and labor it represents. Therefore if that (that being L & R ) doesn't leave the country, I am really confused how that would harm us.

Do you mind giving me examples of resources leaving the country from the kind of capital flight we have been talking about? Not "money" but something physical
ResponsiblyIrresponsible
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9/2/2015 6:06:17 PM
Posted: 1 year ago
At 9/2/2015 5:11:16 PM, ErenBalkir wrote:

Assume that capital gains taxes stay the same. Assume that the return on investments generally stay the same. Also assume that labour tax rates stay the same except for the very wealthiest (VERY wealthy) which rises as the top rate of tax rises. (or even just a crackdown on tax avoidance) . This causes a small degree of capital flight. With those conditions, I will continue.

That presupposes your premise, though, which I don't accept for a number of reasons I stated earlier. A lot of corporations are pass-through, and thus they *pay* that top tax rate, and that would tend to depress investments and returns. You can't really envision an idealistic scenario where you hold a number of things constant and inject circuity into your retorts... the real world doesn't work like that.

Why is it that " if they're not spending money to consume stuff in the US, everyone else needs to pick up the slack" .

Because a shrink in the labor stock -- or in the stock of consumers -- doesn't decrease the amount of total-dollar spending needed to maintain employment. The equiibrium real interest rate would fall, meaning that, insofar as others don't spend more to cover the lapse in spending, you're going to see a prolonged period of high unemployment which might negatively bear on the economy's long-run productive capacity.

What has left the country that now means people have to work more, produce more and government tax receipts fall? Paper?

No, but once again it isn't just "paper." I don't know how much more I can really stress that it isn't just "paper' leaving the country. Granted, it would take a sufficiently high tax rate for that to actually occur, and in most cases it would probably just result in people investing in foreign companies, as opposed to physically *fleeing* (and obviously, yes, capital flight in search of higher returns would depress productivity here, because lack of financial investment >> depresses asset prices >> depressing business investment via negative wealth effect), but you may see some plants move overseas. And, yes, that is a problem that could not be sufficiently solved by "printing paper."

What would be wrong if, when the guy with a brief case full of paper left, we just gave another guy a suitcase full of paper to "replace him".

If our economy is composed of 10 people, and 4 are institutional investors and 6 are gardeners, you can't throw a briefcase at the 6 gardeners and expect them to be able to readily transfer their skills as though they were investors, *and* still work as gardeners. That's probably the clearest explanation I can give you -- with a lower labor stock, we'd be physically unable to produce as much or to account for the same jobs. We'd have a significant shortage of labor, and that itself would tend to bid up wages and increase labor costs. The main wrinkle? That might depress investment -- and thus returns -- *if* people don't come back in, or if immigration doesn't take off due to the higher wages. Again, we don't live in a ceteris-paribus world, so there really is no "easy" answer that you seem to be in search of.

This is in essence what I mean by "printing money". If that suitcase is essential to invest then make another if it leaves. If it isn't essential to invest, then why does it matter if he left or not?

And I explained at length why "printing money" isn't going to work. A precondition for investment is a productive outlet in which to invest. Without that, you get the problem of two much money chasing too few goods.

Why is there "less capital formation here"?

Because capital flight means less financial investment -- so by definition there's less capital formation -- and businesses moving overseas, again by definition, means less capital formation and investment.

Why would fewer factories and equipment be built if a lump of gold left the country?

How do people raise capital to build factories and equipment? Do they wish for it out of the sky, or is it a byproduct of productive investment by financial investors?

We're going around in circles. I mean, we could have state-run enterprises, as China does, that the government alone maintains, but that brings all the inefficiencies of a state-run economy, *and* we'd have to do with lass tax revenue.

I know that gold "represents" capital, but it isn't in its self capital.

You asked me to assume gold was money, didn't you? If gold isn't money, gold moving elsewhere isn't capital flight, so the example you offered is completely tangential to this entire discussion.

If someone dropped the gold down a well, there wouldn't be fewer factories or equipment. The same is true for paper money - if I burn paper money, the country as a whole isn't worse off?

If gold is money, or you actually burnt enough money, of course the country would be worse off. If the Fed contracted the money supply, as it did from 1929 to 1932 by about a third, we get something on par with the Great Depression. The money supply times velocity is equal to nominal GDP, or the size of the economy, so again by definition that would be depressing the economy if it were actually large enough to have a material impact.

So, you are saying that if returns on stocks in china rise and in america fall, commodity prices will rise.

Indirectly, yes, because more financial investment in China would mean more productive investment by businesses in China, and because China is the largest global consumer of raw materials (which explains why commodities suck atm), then raw material prices would tend to rise, representing a negative AS shock to net importers of, say, oil, like the US. For net exporters, it's a positive AD shock.

American business will have to pay more for imports. First, I don't understand the first paragraph and so don't know why that would happen.

See above for a clearer explanation.

Second, How was this all caused by capital flight from the US (assuming my hypothetical upper income tax increase for the super wealthy).

I feel as though I'm talking in circles. I feel as though I explained this mechanism in great depth, but let me try again.

(1) Capital flees US. AD falls, AS falls because companies lose their ability to finance projects, both of which cause investment and consumption to fall.
(2) The fall in consumption begets unemployment, so businesses invest even less
(3) More people are unemployed

It's a pretty classic demand shock. There really isn't much more I can tell you. A lack of financial investment begets a lack of physical investment, and that spawns a number of self-reinforcing, destabilizing effects. Higher taxes effectively erode the incentive to work, to invest, etc., and that's well-documented in the literature.

I'm going to respond to the second part of your post in a second.
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ResponsiblyIrresponsible
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9/2/2015 6:26:11 PM
Posted: 1 year ago
At 9/2/2015 5:11:16 PM, ErenBalkir wrote:
My idea about printing money is based on the idea that if money is taken out of circulation in a country, there will be a little deflation and so government would create money to cause a small amount of inflation to keep inflation steady.

I know what your idea is, but I explained to you why it's completely untenable and would probably create a scenario of "too much money chasing too few goods," because taxes would destroy competition and bid up prices. The "deflation" story is a lot more complex -- and, hell, I could go on for days about the interaction of financial shocks and inflation because there was a conference last week on it. Outright deflation, just like outright hyperinflation, is unlikely with price rigidity and an independent monetary regime, but the supply-side damage may be irreversible.

That to me seems reasonable. Then the question is, will there really be deflation. I think so.

Again, it's much more complex than "I think so." It depends on the magnitudes and elasticities of the countervailing effects that would push prices around, the degree of price rigidity, the policy responses, the degree to which it impacts people's expectations and behavior, etc. It's a lot more complex than you're letting on, and you need to break it down into individual components and consider each.

I mean, I could even do this with number. If I gave you different scenarios -- and there are *many*, as my earlier post implied -- with different elasticities, I could tell you what the approximate impact on prices might be, but I have no idea which scenario is most likely (nor, for that matter, would anyone, because what you're suggesting is completely unprecedent and beyond any present statistical analysis, so we can really only examine it theoretically).

Especially because the inflationary examples you gave like "competition completely tanks, so the few remaining firms can collude to jack up prices to compensate for the lack of capital investment in their firms" doesn't seem realistic and all these were based anyway on tax hikes across the board, not on a very small number of super wealthy individuals.

The entire scenario is completely unrealistic, but it's not unrealistic to stipulate that capital flight -- albeit an unrealistic scenario in itself because the tax rate that would spawn that is probably politically infeasible -- would depress competition. It's also not unprecedented to think that productivity or productive capacity would erode. All of those things would produce upward pressure on prices. There's also the Fed's response to the demand shock, which again would tend to push prices upward.

Here's an example of how complex prices are. We just had the global financial crisis, the worst AD shock since the Depression. Every DSGE model predicted outright and sustained deflation, but it never happened. We also didn't have hyperinflation because of QE, because banks held cash. Why didn't prices adjust upward to the Fed printed around $3.7 trillion? Prices are *sticky* and expectations are well-anchored, and those feed through to prices. A paper presented last week found, for instance, that amid financial shocks, healthy firms would cut their prices to draw in market share, while unhealthy firms -- firms that can't access capital -- would raise their prices to compensate for their potentially insolvent position. Inflation is *a lot* more complicated than you're letting on, and it's possible -- and likely -- that the entire Phillips curve is completely bogus, or at least over higher frequencies. We can't boil these complex scenarios into bit-size pieces without losing the forest through the trees.

I would also like to say that, if a bag of dollars is stuffed under the sofa, that will mean money is out of circulation and will cause deflation. Is this not similar to money leaving the country?

It's similar to money leaving the country, sure. If that caused a sizeable enough, material enough, and unmitigated decline in the supply of loneable funds, then it might -- but, again, the mechanism by which it would cause deflation (Phillip curve) are highly suspect.

Can you give me examples of real resources physically leaving the country as a result of capital flight ( not businesses but individuals leaving) ? If you've already mentioned one, I must of missed it. Sorry.

I can't think of any off-hand, though there are probably some anecdotes of resources fleeing France for Luxembourg, or something. The hypothetical you're posing is itself completely unprecedented, so obviously we can't merely extrapolate off the graph for less severe shocks, which would obviously have disparate outcomes (that could even depend, for instance, on confidence in that country's institutions).

"Obviously money is needed for investment," - yes, I understand that but the money itself is not what is needed but the resources and labor it represents.

No, that's just not true. Keynes wrote about this at length because David Ricardo -- and his famous "Corn Model" wherein people physically ate their earnings -- though something similar. Money is a resource in and of itself. The resources might exist, but if businesses cannot productively and profitably access them, they're useless. If one business, due to efficiencies or economies of scale or what have you, could access and bid resources prices up beyond what a rank-and-file mom and pop can afford, the larger business wins out and subsumes more market share (that's where prices rise).

Therefore if that (that being L & R ) doesn't leave the country, I am really confused how that would harm us.

It probably would, accompanying the flight of capital (if you were a business owner, would you stay in a country where the returns on your physical investments and your profitability prospects suck?), but that's not the only thing that matters by far

Do you mind giving me examples of resources leaving the country from the kind of capital flight we have been talking about? Not "money" but something physical

Again, it's the same issue as above: your hypothetical is theoretical in nature, so there is no past scenario that comes to mind that could even remotely replicate it.
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