So, as I understand it, the value of one's money is in its purchasing power, and its purchasing power is related to its amount relative to others. That is to say: Earning 25k a year in a country where the mean income is 10k makes you very rich, whereas earning 25k in a country where the mean income is 50k means your 25k does not go nearly as far.

So my question is this: Does this mean that an across-the-board percentage income tax cut does not increase anyone's wealth? If everyone has x% more money, isn't their purchasing power still identical? Obviously, the second it happens, prices and wages are the same, so in that moment they have more, but don't prices and wages catch up? Or does the definition of purchasing power shift.. one could buy more of certain goods, but the prices of things like housing rise to reflect the increased amount of money people have to bid on them?

Confounding factors I can think of: Global prices, capital shift between public and private sector

  • $\begingroup$ In this setting, what can households and firms spend money on? It seems like there is money, labor markets, and some sort of final consumption good. Is there capital? $\endgroup$ – BKay Oct 14 '16 at 13:26
  • $\begingroup$ It's intended as a real-world question, so as open a model as possible. Are there real-world studies where people have measured the financial well-being of citizens before and after an across-the-board income tax cut? $\endgroup$ – roberttdev Oct 14 '16 at 14:11
  • $\begingroup$ The purchasing power of the currency doesn't change but each person has more currency than they did before. Assuming the influx of spending isn't enough to shift prices such that the effect of having a bit more money isn't netted out, we could reasonably assume that people will be - to some extent - better off. $\endgroup$ – 123 Oct 14 '16 at 15:02
  • $\begingroup$ There may actually be three questions here: (a) Given you have a set amount of wealth and income, is it better to live where your neighbours are richer than you or where they are poorer than you? (b) Is purchasing power purely relative rather than having an absolute component? (c) Does an across-the-board income tax cut have a real impact, or will resulting changes (prices, wages, public services, future taxes) cancel this out? Personally I would say (a) people see to prefer rich neighbours; (b) absolute levels matter too; (c) a complicated and political question $\endgroup$ – Henry Oct 15 '16 at 10:26
  • $\begingroup$ Try your hypothetical a different way... what is the effect of an across-the-board tax hike? Does that decrease anybody's wealth? It does, of course, just as it increases the state's wealth. This is not changing the amount of money in circulation, you are just shifting it between the public and private sector, with whatever change in spending priorities and efficiencies that entails. $\endgroup$ – Ask About Monica Oct 17 '16 at 19:09

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