Monday, 31 October 2011

Fiscal Policy - No Brainers

1. We have a demand shortfall crisis in the economy.
2. We have a long term structural deficit problem.
3. David Cameron says we need to focus on the deficit.

But he also says that we should abolish investment expensing in return for an across the board corporation tax cut.

In other worse, we should increase the marginal cost of investing in machinery and plants in this country (and thereby creating demand) and we should decrease the cost of hoarding profit, which will probably be saved precisely because there is a demand shortfall and so investments have to be more cost effective than ever in order to justify themselves. So the policy in balance does little or nothing to solve the deficit problem (because abolition of investment expensing is offset by corporate tax deductions) whilst worsening the demand shortfall (by increasing the marginal cost of investment decisions).

This is a no brainer.

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