The great economist Paul Samuelson died last Sunday 13 December 2009 at age 94. He brought mathematics to economic analysis along the line of Keynes. His textbook, "Economics" brought him wealth but it was his PhD thesis on 'The Foundations of Economic Analysis" which brought him fame and the Nobel prize.
There are many excellent orbituaries written on him around the world.
Below I will put in some thoughts on what I was taught about his theories, for the purposes of talking about economic analysis in the hope that it will not be taken as an attempt at a cheap shot at a giant at such a sad moment, which this is not. It is about ideas, not person.
Samuelson can be credited for bringing mathematics into analytical rigour in economic theorising. While many major implications can be brought out from the established framework (or paradigm), nonetheless, the danger, in the views of his opponents, was that it prevented people from thinking outside that established box. Here, Keynes' theory degenerated at the initial attempt by Hicks (with his ISLM model) through Alvin Hansen (Samuelson's teacher) to Samuelson into what is now called the Neoclassical Synthesis.
The Neoclassical Synthesis is an attempt to incorporate Keynes' ideas into a Neoclassical model, resulting in a Neoclassical model with Kynesian characteristics, principally in the form of the demand for money function which replaces the demand for loans equation. The rest remained essentially unchanged.
Disatisfaction by the "true" disciples of Keynes over the Neoclassical Synthesis rages in the form of the Capital Theory Controversy which attempts to show the tautology in the Neoclassical construction. If the profit rate is the return on capital, what is "capital" and how do you calculate it without the resorting to the return on capital which is the profit rate and the rate of interest, in equilibrium. Joan Robinson, followed GC Harcourt and then Paul Davidson won't let go.
The capital theory controversy still lingers in the minds of bored Keynesians, while the rest of the world happily ignores this logical inconsistency and runs the global economy down to ground with zero interest rates. Is there no such a thing as "profit" except the extraction of surplus value?
Monday, December 14, 2009
Thursday, December 10, 2009
What Is So Sacrosanct About the Stock Market?
Greg Mankiw picked up a piece by his old prof, the one who wrote A Random Walk Down Wall Street, who recently argued that a transaction tax on the stock market will kill the economy by discouraging stock market speculation and hence the inflow of cash into the US to fund its budget deficit. Is the stock market so sacrosanct?
The only major reason for economists to argue that there should be no tax on stock market incomes is that there is no value add in stock market incomes - that the people involved in the stock market do not add any value to the economy. What they are engaged in is merely the transfer of income from one pocket to the other.
But the current argument by the stock market guru that there should no a transaction tax on stock market trading because it will hinder the functions of the stock market.
"Transactions taxes would make most current high-frequency trades unprofitable since they depend on the thinnest of profit margins. Trading volume would collapse, and there would be a dramatic shortfall in the tax dollars actually collected by the government. Market liquidity would decline, bid-offer spreads would widen, and all investors would pay significantly higher costs on their trades."
But brokers do get paid for doing transaction work for investors. But the article argued that transaction costs have come down due to technology and a transaction tax on stock market trading will raise the transaction cost and make that market uncompetitive.
So the argument is really not about whether there should be a tax or not, but how much.
Which means that the stock market is not sacrosanct.
The stock market survives on two major factors in descending order of importance:
1. Value of the companies on the stock market. No amount of speculation will raise that intrinsic value which is based entirely on correct investment and value addition.
2. Liquidity which will arise if the corporate values are intrinsically good and when the central bank becomes silly by pumping loads of cash into the system to inflation market prices which result in a diversion of focus from investment in companies to speculation in the stock market.
We have seen from the Malaysian experience of the 1990s, and the US and Europe today, how an extremely active stock market has ruined the resolve of corporate investors in undertaking proper business plans.
In a highly liquid global market that we are in today, the fear of not illiquidity but lack of investment ideas - which leads to an oversupply of the same old stuff that everybody has already.
Furthermore, the stock market leads to a massive redistribution of wealth (since there is no income generated), and a transaction tax can be seen as a mild wealth tax, on the argument that traders on the markets are savers and investors with the wealth to invest.
A transaction tax will hopefully divert investor focus from the frail financial world to the real economy.
The only major reason for economists to argue that there should be no tax on stock market incomes is that there is no value add in stock market incomes - that the people involved in the stock market do not add any value to the economy. What they are engaged in is merely the transfer of income from one pocket to the other.
But the current argument by the stock market guru that there should no a transaction tax on stock market trading because it will hinder the functions of the stock market.
"Transactions taxes would make most current high-frequency trades unprofitable since they depend on the thinnest of profit margins. Trading volume would collapse, and there would be a dramatic shortfall in the tax dollars actually collected by the government. Market liquidity would decline, bid-offer spreads would widen, and all investors would pay significantly higher costs on their trades."
But brokers do get paid for doing transaction work for investors. But the article argued that transaction costs have come down due to technology and a transaction tax on stock market trading will raise the transaction cost and make that market uncompetitive.
So the argument is really not about whether there should be a tax or not, but how much.
Which means that the stock market is not sacrosanct.
The stock market survives on two major factors in descending order of importance:
1. Value of the companies on the stock market. No amount of speculation will raise that intrinsic value which is based entirely on correct investment and value addition.
2. Liquidity which will arise if the corporate values are intrinsically good and when the central bank becomes silly by pumping loads of cash into the system to inflation market prices which result in a diversion of focus from investment in companies to speculation in the stock market.
We have seen from the Malaysian experience of the 1990s, and the US and Europe today, how an extremely active stock market has ruined the resolve of corporate investors in undertaking proper business plans.
In a highly liquid global market that we are in today, the fear of not illiquidity but lack of investment ideas - which leads to an oversupply of the same old stuff that everybody has already.
Furthermore, the stock market leads to a massive redistribution of wealth (since there is no income generated), and a transaction tax can be seen as a mild wealth tax, on the argument that traders on the markets are savers and investors with the wealth to invest.
A transaction tax will hopefully divert investor focus from the frail financial world to the real economy.
Wednesday, December 9, 2009
GST & Tax Reform for Malaysia
In the current furore over the GST, I have been having a rethink on the tax regime in Malaysia.
1. It is not a good reason for the government to tax the people for the purpose of building a bureaucracy or to stimulate the economy. The only good reasons are: affordable or free and good quality education and healthcare for everyone, urban public transport, security and law and order.
2. If the government have to raise taxes, how can it do it most efficiently, in the sense of with minimal cost to the government but without overburdening the people to the extent that the economic growth suffers.
3. In the past, the thinking on tax was that the rich should be taxed more than the poor. The progressive income tax regime of today was designed precisely for the reason of redistributing income. The wealth tax and the property gains tax are to redistribute wealth.
4. The current fashion in tax thinking is to tax consumption rather than income. A major reason for doing this is to reduce consumption and encourage income, so that savings and investment will rise. If this is the reason, then income tax should be abolished and be replaced with the consumption tax which is a tax on both goods and services bought.
5. Abolishing the income tax is not that far-fetch an idea. Many big companies are exempt from paying the corporate income tax, for one reason or another, as an incentive to invest. It is just a matter of extending that privilege to the many small companies as well as salary-earning employees.
6. In turn, the GST can be imposed across the board, although there are many potential problems of implementation. (It creates a huge load of paperwork for many small establishments. Presumably, this can be computerised which implies the need to itemise every transaction. The GST is also subject to abuse by establishments who happy impose a service tax and a government tax. There seem to be no enforcement on extraneous charges on bills.) The poor can be compensated by increasing their allowance, if they have any.
7. The GST may not be the main source of revenue. Other sources should be explored, including taxing stock market transactions.
8. In the absence of the income tax, the government can really go into the Public-Private Partnership (PPP) by designing and specifying public projects which the corporate sector or rich individuals can offer to finance.
9. There should also be a freeing up of government restrictions on areas of entry by the private sector, such as healthcare and education, so that more of these services can be privately funded as charities or business organisations.
10. Alternatively, another way to reform the tax regime is for the government to do a 5% across the board - on corporate incomes, personal incomes, retail transactions on goods and services, stock market transactions, without exemptions for big companies. This will really broaden the tax base.
1. It is not a good reason for the government to tax the people for the purpose of building a bureaucracy or to stimulate the economy. The only good reasons are: affordable or free and good quality education and healthcare for everyone, urban public transport, security and law and order.
2. If the government have to raise taxes, how can it do it most efficiently, in the sense of with minimal cost to the government but without overburdening the people to the extent that the economic growth suffers.
3. In the past, the thinking on tax was that the rich should be taxed more than the poor. The progressive income tax regime of today was designed precisely for the reason of redistributing income. The wealth tax and the property gains tax are to redistribute wealth.
4. The current fashion in tax thinking is to tax consumption rather than income. A major reason for doing this is to reduce consumption and encourage income, so that savings and investment will rise. If this is the reason, then income tax should be abolished and be replaced with the consumption tax which is a tax on both goods and services bought.
5. Abolishing the income tax is not that far-fetch an idea. Many big companies are exempt from paying the corporate income tax, for one reason or another, as an incentive to invest. It is just a matter of extending that privilege to the many small companies as well as salary-earning employees.
6. In turn, the GST can be imposed across the board, although there are many potential problems of implementation. (It creates a huge load of paperwork for many small establishments. Presumably, this can be computerised which implies the need to itemise every transaction. The GST is also subject to abuse by establishments who happy impose a service tax and a government tax. There seem to be no enforcement on extraneous charges on bills.) The poor can be compensated by increasing their allowance, if they have any.
7. The GST may not be the main source of revenue. Other sources should be explored, including taxing stock market transactions.
8. In the absence of the income tax, the government can really go into the Public-Private Partnership (PPP) by designing and specifying public projects which the corporate sector or rich individuals can offer to finance.
9. There should also be a freeing up of government restrictions on areas of entry by the private sector, such as healthcare and education, so that more of these services can be privately funded as charities or business organisations.
10. Alternatively, another way to reform the tax regime is for the government to do a 5% across the board - on corporate incomes, personal incomes, retail transactions on goods and services, stock market transactions, without exemptions for big companies. This will really broaden the tax base.
Friday, December 4, 2009
Scarcity & Markets
Economists talk of scarcity of resources and the role of the market in ensuring the efficiency of resource allocation. Is this true in real life?
To a certain extent, scarcity exists when we talk of what is available at our disposal today, and our ability to transform those available natural resources into things we want or desire.
In reality, given what we already know, there is still immense scope for people to produce the things that we want or desire. It is just a matter of unleashing the productive talent, and things will be produced. A whole new world is being created in China just by the stroke of the pen, and the freedom for people to follow their instinct for survival or security.
The efficiency that economists talk about is really the efficiency of production or getting what we want from the same amount of resources. This reflects our technological knowledge.
Of course, market efficiency can be obtained if the market is not controlled so that more output and lower prices can be obtained by consumers as producers compete to survive.
If we have businesses controlling policy, then the tendency is for policy to ensure prices high enough for business to make money, not matter how inefficient they may be.
But the markets we have in the world today is an exchange market. The market is where different producers of different products exchange with each other their products.
The market is an attempt at diversity, to exchange what we have plenty with others for the little or nothing that we have but where they have plenty. It is not an attempt at unity except probably for the price, and even this is possible only under very special conditions.
But the market does not spread efficiency between those who have with those who have not. Those who have not are excluded from the market. They are outside the market. They cannot participate. To participate, they must attempt at production, and hopefully something which they like and which others like as well. They must also be able to increase the production, so that there is a surplus to trade.
There can be no advantage to be obtained by restricting others in production, so that one can have the market. This will merely result in a lower output level.
The only way that restrictions can work is in commerce, where one can trade but others cannot trade. This assumes that both the market demand and supply are available, without any productive work involved. In this case, with market restrictions, market demand may not be sustainable because there is a constant leakage from the system in the form of rent or profits from restrictions, and the tendency is for the economy to go down on a vicious cycle.
A temporary way out of that vicious cycle is by printing money, when the central bank lends to the government or when banks lend to consumers.
A better way out of the vicious cycle is by increasing confidence and investment, aided by banks lending to businesses and investors.
To a certain extent, scarcity exists when we talk of what is available at our disposal today, and our ability to transform those available natural resources into things we want or desire.
In reality, given what we already know, there is still immense scope for people to produce the things that we want or desire. It is just a matter of unleashing the productive talent, and things will be produced. A whole new world is being created in China just by the stroke of the pen, and the freedom for people to follow their instinct for survival or security.
The efficiency that economists talk about is really the efficiency of production or getting what we want from the same amount of resources. This reflects our technological knowledge.
Of course, market efficiency can be obtained if the market is not controlled so that more output and lower prices can be obtained by consumers as producers compete to survive.
If we have businesses controlling policy, then the tendency is for policy to ensure prices high enough for business to make money, not matter how inefficient they may be.
But the markets we have in the world today is an exchange market. The market is where different producers of different products exchange with each other their products.
The market is an attempt at diversity, to exchange what we have plenty with others for the little or nothing that we have but where they have plenty. It is not an attempt at unity except probably for the price, and even this is possible only under very special conditions.
But the market does not spread efficiency between those who have with those who have not. Those who have not are excluded from the market. They are outside the market. They cannot participate. To participate, they must attempt at production, and hopefully something which they like and which others like as well. They must also be able to increase the production, so that there is a surplus to trade.
There can be no advantage to be obtained by restricting others in production, so that one can have the market. This will merely result in a lower output level.
The only way that restrictions can work is in commerce, where one can trade but others cannot trade. This assumes that both the market demand and supply are available, without any productive work involved. In this case, with market restrictions, market demand may not be sustainable because there is a constant leakage from the system in the form of rent or profits from restrictions, and the tendency is for the economy to go down on a vicious cycle.
A temporary way out of that vicious cycle is by printing money, when the central bank lends to the government or when banks lend to consumers.
A better way out of the vicious cycle is by increasing confidence and investment, aided by banks lending to businesses and investors.
Monday, November 30, 2009
The Economic Enlightenment Of Adam Smith: The Lesson For Malaysia & China
Most economists, learned or otherwise, associate Adam Smith's economics with the workings of the invisible hand in markets - and presumed that the market economy is the best way an economy works. Whilst this may be true under special conditions, there are limitations to the market such as the existence of monopolies, the insufficiency of market size, and the failure of market signals. So the market economy is more than just supply meeting demand.
So, Adam Smith's greatness, to me, is not his views on the market, but his enlightened view that economics is not about the accumulation of wealth but the increased production and consumption of goods and services that results in an improvement in human wealth.
He argued against the focus of the policies of politicians on the accumulation of gold and foreign reserves (wealth) as such policies tend to create monopolies, trade restrictions, the underpayment of workers (his labour theory of value led to Marx's militancy), and general inflation who adversely affect the general public.
Instead, Adam Smith argued that the focus of policy should be on building the prerequisites for an improvement in human welfare where more consumption can be obtained using the same amount of resources simply through specialisation and exchange. It is not a question of price but economies of scale and exchange.
To improve human welfare given the resources we have, it is far better for individuals or societies to specialise in what they are good at rather than trying to do everything themselves. It is possible to do everything on one's own but it is far better for everybody to cooperate - each doing what they are good at, for otherwise, we will be wasting the opportunities to do things better for oneself and everybody else.
Who does what therefore depends on what one is good at, naturally or trained, and depending upon consumer needs the renumeration or return one gets. It is just a question of knowledge and training.
If this system can be made open and unbiased (through proper teaching and training), then it is possible to train people to do good for society and to think and formulate in the interest of society.
It therefore does not augur well for our economic future if we teach our young to be self-interested and restrictive in their generosity. They may be wealthy but we will pity for their selfishness.
We can be generous only if we are confident about ourselves and our environment.
China can grow on its own if its entrepreneurs and captains of industry can bring themselves to pay workers sufficiently so that they can live a better existence. Afterall, the whole purpose of production is for the consumption of the people - rather than just to export and accumulation foreign reserves who turn out to be the worthless papers of a silly government.
That's why we should always focus to specialise in order to do things better so that we can all have everything that we need - which means that we should strive to be ordinary and homogeneous so that others may also have what we have. Otherwise, we'll all live poor lives.
So, Adam Smith's greatness, to me, is not his views on the market, but his enlightened view that economics is not about the accumulation of wealth but the increased production and consumption of goods and services that results in an improvement in human wealth.
He argued against the focus of the policies of politicians on the accumulation of gold and foreign reserves (wealth) as such policies tend to create monopolies, trade restrictions, the underpayment of workers (his labour theory of value led to Marx's militancy), and general inflation who adversely affect the general public.
Instead, Adam Smith argued that the focus of policy should be on building the prerequisites for an improvement in human welfare where more consumption can be obtained using the same amount of resources simply through specialisation and exchange. It is not a question of price but economies of scale and exchange.
To improve human welfare given the resources we have, it is far better for individuals or societies to specialise in what they are good at rather than trying to do everything themselves. It is possible to do everything on one's own but it is far better for everybody to cooperate - each doing what they are good at, for otherwise, we will be wasting the opportunities to do things better for oneself and everybody else.
Who does what therefore depends on what one is good at, naturally or trained, and depending upon consumer needs the renumeration or return one gets. It is just a question of knowledge and training.
If this system can be made open and unbiased (through proper teaching and training), then it is possible to train people to do good for society and to think and formulate in the interest of society.
It therefore does not augur well for our economic future if we teach our young to be self-interested and restrictive in their generosity. They may be wealthy but we will pity for their selfishness.
We can be generous only if we are confident about ourselves and our environment.
China can grow on its own if its entrepreneurs and captains of industry can bring themselves to pay workers sufficiently so that they can live a better existence. Afterall, the whole purpose of production is for the consumption of the people - rather than just to export and accumulation foreign reserves who turn out to be the worthless papers of a silly government.
That's why we should always focus to specialise in order to do things better so that we can all have everything that we need - which means that we should strive to be ordinary and homogeneous so that others may also have what we have. Otherwise, we'll all live poor lives.
Disequilibrium & Positive Change
Sometimes I wonder whether we human beings know exactly what we want.
We are constantly unhappy with what we have in order to create change.
1. Equilibrium
We dislike equilibrium and create disequilibrium.
Equilibrium means a stable state where everything is functioning well and smoothly. There are two such states: desired, or undesired.
If undesired, we want to get out of our low equilibrium by creating change and disequilibrium. In so doing, we hope to start the journey of arriving at a higher desired equilibrium state.
If desired, we would be quite happy for the equlibrium state to carry on forever.
2. Malaysian Society
In the context of Malaysia, when we started out in 1957, the economy was in high equilibrium but the society was in low equilibrium.
There was intention to disturb the low social equilibrium in the hope of maintaining the same high economic equilibrium.
In so doing, the social disequilibrium led to the downward adjustment of the economy as confidence evaporated.
3. What Do We Do?
Efforts are now made to re-establish the social equlibrium in the sense of social harmony. This is a good thing and should be vigorously pursued.
Whether this will necessarily lead to a higher economic equilibrium is another matter.
For all we know, we may want an economic disequilibrium with a process or dynamics that can bring us higher and higher, rather than stagnating at some sketchy vision.
It is a fact that Malaysia today faces an unsettling of its society with agitation at all levels.
While agitation will create change, there is no guarantee that things will necessarily change for the better. It takes good people in high places who know what they are doing to create positive change.
We cannot go back to where we were. We may not want to. But the forward march should start with more than just the same old agitation. It should be a modern view that our young generations can relate, for it is going to be their burden.
We are constantly unhappy with what we have in order to create change.
1. Equilibrium
We dislike equilibrium and create disequilibrium.
Equilibrium means a stable state where everything is functioning well and smoothly. There are two such states: desired, or undesired.
If undesired, we want to get out of our low equilibrium by creating change and disequilibrium. In so doing, we hope to start the journey of arriving at a higher desired equilibrium state.
If desired, we would be quite happy for the equlibrium state to carry on forever.
2. Malaysian Society
In the context of Malaysia, when we started out in 1957, the economy was in high equilibrium but the society was in low equilibrium.
There was intention to disturb the low social equilibrium in the hope of maintaining the same high economic equilibrium.
In so doing, the social disequilibrium led to the downward adjustment of the economy as confidence evaporated.
3. What Do We Do?
Efforts are now made to re-establish the social equlibrium in the sense of social harmony. This is a good thing and should be vigorously pursued.
Whether this will necessarily lead to a higher economic equilibrium is another matter.
For all we know, we may want an economic disequilibrium with a process or dynamics that can bring us higher and higher, rather than stagnating at some sketchy vision.
It is a fact that Malaysia today faces an unsettling of its society with agitation at all levels.
While agitation will create change, there is no guarantee that things will necessarily change for the better. It takes good people in high places who know what they are doing to create positive change.
We cannot go back to where we were. We may not want to. But the forward march should start with more than just the same old agitation. It should be a modern view that our young generations can relate, for it is going to be their burden.
Saturday, November 28, 2009
Consumption Tax Or GST
de minimis stirred up some dust on GST with the help of walla; I here contribute a speck or two.
Q: What is the purpose of imposing a consumption tax?
A: To reduce consumption and to increase tax collection.
Q: Whose consumption will be reduced?
A: Those at the margin.
That is, those who have a very tight and they have to decide whether they want to buy A or B because now they cannot afford it because of the GST when they could buy both A and B before. They may forego B and left with A and have some cash to spare.
But if A is rice and B is milk, then obviously there is a problem for the consumer which the government may wish to step in to help if it wants to stay in power.
If A is a watch and B is a phone, then probably the problem isn't that severe and the government is happy to reduce that consumption.
Q: What is the reason for reducing consumption?
A: There is no particular good reason. In fact, it goes against the latest craze over stimulating demand by reducing the EPF contribution and putting money into the pockets of consumers.
But if you insist, then we have to go back to the textbook which says that it is better to impose a consumption tax to discourage consumption and to reduce income tax in order to encourage work and production.
Q: So will there be a reduction in the income tax with the impostion of the GST?
A: The answer is probably no, and the justification is probably that there has been a cut in the income tax already in the last budget.
Q: Why is it that the GST will be 4% when the last income tax cut was 1%? Is it fair?
A: The probable answer is yes because the objective is to raise taxes. But this answer is not healthy.
The GST will hit the total turnover or revenue as this is what final consumers will pay. Income comprising profit and wages and fees are at best a fraction of the total turnover of the economy. If profit and wages are 30% of the final sale price, then the income tax may need to be cut 3% to be equivalent to a 1% imposition of the consumption tax.
Since the expressed objective of the government is to increase tax collection, we may accept a 1% consumption tax to the 1% income tax cut.
Q: Will the consumption tax stimulate work and production?
A: No, if there is no or no significant cut in the income tax. The government then cannot claim to be stimulating work and production when it is imposing the consumption tax which will discourage consumption.
Q: Will there be inflation?
A: No, because it's objective is to reduce consumption. When retailers expect a reduction in their sales, they are likely to absorb the consumption tax.
Q: Will there be a reduction in consumption?
A: No, if the retailers are absorbing the consumption tax.
Q: Will it put marginal retailers at risk?
A: If no reduction in income tax, yes. If there is sufficient income tax reduction, consumption may even rise. This then defeats of discouraging consumption (and encouraging savings) and increasing the incentive for work.
Q: Will a consumption tax increase savings?
A: Not necessarily, if there are insufficient savings instruments.
Q: Will the consumption tax stimulate the economy?
A: Not necessarily. The consumption tax will increase the tax collection for the government. Somebody has to pay for it. If it is the local consumers, then there is a net reduction of the welfare of the local people. The only time when an increase in tax does not impair the welfare of the people is when the economy is growing and that growth comes from investment.
The trick for the government in trying to solve its fiscal problem is not to raise more taxes but to spend less and at the same time trying to encourage more investments by pulling up its socks!
Q: What is the purpose of imposing a consumption tax?
A: To reduce consumption and to increase tax collection.
Q: Whose consumption will be reduced?
A: Those at the margin.
That is, those who have a very tight and they have to decide whether they want to buy A or B because now they cannot afford it because of the GST when they could buy both A and B before. They may forego B and left with A and have some cash to spare.
But if A is rice and B is milk, then obviously there is a problem for the consumer which the government may wish to step in to help if it wants to stay in power.
If A is a watch and B is a phone, then probably the problem isn't that severe and the government is happy to reduce that consumption.
Q: What is the reason for reducing consumption?
A: There is no particular good reason. In fact, it goes against the latest craze over stimulating demand by reducing the EPF contribution and putting money into the pockets of consumers.
But if you insist, then we have to go back to the textbook which says that it is better to impose a consumption tax to discourage consumption and to reduce income tax in order to encourage work and production.
Q: So will there be a reduction in the income tax with the impostion of the GST?
A: The answer is probably no, and the justification is probably that there has been a cut in the income tax already in the last budget.
Q: Why is it that the GST will be 4% when the last income tax cut was 1%? Is it fair?
A: The probable answer is yes because the objective is to raise taxes. But this answer is not healthy.
The GST will hit the total turnover or revenue as this is what final consumers will pay. Income comprising profit and wages and fees are at best a fraction of the total turnover of the economy. If profit and wages are 30% of the final sale price, then the income tax may need to be cut 3% to be equivalent to a 1% imposition of the consumption tax.
Since the expressed objective of the government is to increase tax collection, we may accept a 1% consumption tax to the 1% income tax cut.
Q: Will the consumption tax stimulate work and production?
A: No, if there is no or no significant cut in the income tax. The government then cannot claim to be stimulating work and production when it is imposing the consumption tax which will discourage consumption.
Q: Will there be inflation?
A: No, because it's objective is to reduce consumption. When retailers expect a reduction in their sales, they are likely to absorb the consumption tax.
Q: Will there be a reduction in consumption?
A: No, if the retailers are absorbing the consumption tax.
Q: Will it put marginal retailers at risk?
A: If no reduction in income tax, yes. If there is sufficient income tax reduction, consumption may even rise. This then defeats of discouraging consumption (and encouraging savings) and increasing the incentive for work.
Q: Will a consumption tax increase savings?
A: Not necessarily, if there are insufficient savings instruments.
Q: Will the consumption tax stimulate the economy?
A: Not necessarily. The consumption tax will increase the tax collection for the government. Somebody has to pay for it. If it is the local consumers, then there is a net reduction of the welfare of the local people. The only time when an increase in tax does not impair the welfare of the people is when the economy is growing and that growth comes from investment.
The trick for the government in trying to solve its fiscal problem is not to raise more taxes but to spend less and at the same time trying to encourage more investments by pulling up its socks!
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