In my macro econ textbook it says here that “An increase in government purchases or a decrease in taxes reduces national saving for any given level of income.”
My textbook is biased toward Keynesianism so I tend to doubt alot of the stuff it says. I could be wrong, but I’m just tryin to think this through.. the logic provided by my professor is that lower taxes make goods cheaper which will increase consumption and thus decrease savings. But it seems to me that the increase in consumption is a direct result of an increase in purchasing power, effectively a raise in income, so although you may consumer more goods you won’t necessarily spend more money, in which case your savings wouldn’t be affected. On top of that, there are some goods for which your consumption won’t change and you’ll just have more money which can be saved or invested.
No, you are not way off base. Savings are not related to government purchases at all. A decrease in taxes, is an incentive to work (produce) more. One would think that increased production would cause increased consumption AND increased saving. Even if the ratio shifts towards consumption for the marginal increase in net income, that’s still more savings than without the tax reduction.
Wrong, empirical studies and a priori reasoning show that if you have more purchasing power, you’ll save more. After all, will anyone argue that millionaires save less than minimum wage earners? There is only so much that you can buy, so logic tells us that, generally, the more purchasing power people will have the more they’ll save.
So a reduction of taxes means an increase in saving under normal conditions.
In other words, a tax cut raises people’s time preference. Nonsense.
I assume you mean “won’t necessarily spend more money” as a percentage of your income. But you will (probably) spend more in absolute terms, so prices of consumer goods will rise (that’s why clueless government morons claim tax cuts “cause inflation”)
No. And more saving => lengthening of production => greater output of consumption goods => more and cheaper (so consumer goods prices will fall again, below what they were before)
