Absolute Income - the Government Side

Back in my community theater/drinking days (I know I am being redundant), I was having a high octane discussion at the strike party with the boyfriend of one of the stage crew. We were discussing the utility of tax cuts, or the lack thereof. I told him that we could never do so with a GDP measure. GDP is based on productive activity in the real economy: government purchases, household consumption, net exports and investment in plant and equipment. He would need a different measure. We left it at that.

As an aside, government's impact comes in more than just buying stuff. It is a major contributor to household consumption through other and including the stuff it buys. It buys or creates natural resources (food, oil, land, and water), supplies, buildings, military assets, health care (military, civil service, old age, disabled, Indian, international, indigent), transportation infrastructure roads, airports, bridges, spaceports, and private capital used to make government purchases.

It also distributes current and future household income via employee salaries, military pay, government pensions, old age, survivors and disability income, interest on government trust funds, contractor pay and benefits, Temporary Assistance to needy Families, Food Stamps, supplemental security income, temporary disability income, refundable income and child credits, pays net interest to bond holders, and distribution of resource payments to tribal nations (land rentals and resource extraction). This amounts to more than half of household income resulting in consumption and savings.

Consumption from these income streams also creates private sector income, leading to consumption and savings (second and third order - which is private sector spending and savings resulting from private sector consumption). All of this leads to investment in land, plant and equipment for household consumption and exports.

Tax collections and double counting are the means by which all if this spending goes round and round. The double and triple counting is what is known as the multiplier effect.

There is one last chunk created through tax expenditures: preferred tax treatment of capital income and investment and cuts in expected salary taxes. This added liquidity is not small. It is what was being discussed at that cast party.

All that prefaces the answer to that question: what do tax cuts do for the economy? The question, which I think we also brought up at the party, is essentially the same: how do to measure the supply side? Let's talk, but you may not like the answer.