25 March 2013

Let's get this economy started!

Watching the news about the Cypriot plans to tax savings got me thinking that that's something that might actually work, but maybe not in the way they expect, so long as they are careful about which savings to tax (or at least tax most).  The thought actually started with Tory (and US Republican) claims that the tax breaks for the wealthy would help the economy as they are 'job creators'. 

That claim makes me hope that they are lying, or at least being disingenuous, because I'd hate to think that people so devoid of knowledge of how business works are running this country (although looking at the backgrounds of the Tory front bench makes me fear that they may be).  Anyone who has run a small/medium sized business (say 10 - 300 employees), or even just worked in one and taken an interest in where their pay comes from, knows that (with the possible exception of family members) you don't take someone on (i.e. create a job) because you can afford to.  You take someone on because if you don't you can't meet the volume of production your customers demand.  You have the fewest number of jobs that you can get away with, no more.  If you want to create jobs you first need to create the demand for the output of those jobs.  The great thing is that properly managed this becomes a positive feedback model where as more jobs are created they also create more demand.

Here comes how taxing savings, so long as the right sort of savings are taxed, might help.  Most savings are essentially dead money, the bank may leverage them to fund investments (if they were investing right now) or bolster reserves but other than that they sit there earning small rates of interest.  If Low Interest/High Liquidity savings were taxed (especially at the 40% rate proposed in Cyprus) that would incentivise the savers to stop sitting on them and spend them.  This would prime the pump for extra demand leading to job creation.  The difficult part would be keeping the demand in country so as to avoid the money simply going to China, India &c so helping create jobs there and to keep the keep the demand flowing long enough.

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