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Supply - side economics (Part III) The Elimination of Productive Market Exchanges

Most people have jobs at which they are good; an accountant, a carpenter, an automobile mechanic, are all relatively good at their professions. That's probably why they chose those lines of work to begin with - and all that on-the-job training didn't hurt either.

When you need your taxes prepared - especially if you stand to save several thousand dollars—you go to an accountant. When you need your transmission fixed, unless you're a skilled mechanic, you'll certainly be better off going to someone who is. In fact, one of the main reasons our standard of living is so high in the United States is because a large proportion of our labor force is composed of individuals with specialized skills.

What happens when your roof must be reshingled? Do you hire a roofer, or do you do it yourself? Do you do it yourself because it's cheaper?

Well, maybe it's cheaper and maybe it isn't. Suppose you can reshingle your roof in 100 hours and a roofer can do the job in 60 hours. If the roofer charges you $12 an hour (in addition to materials), it will cost you $720. How many hours would you have to work to earn $720? Suppose your clerical job pays $9 an hour and you are in the 40 percent marginal tax bracket. You take home only $5.40 an hour (that is, 60 percent of $9).

Do you hire the roofer or do it yourself? If you do it yourself, it will take you 100 hours. If you hire the roofer, you must pay him $720. How many hours would you have to work to bring home $720? Figure it out: $720/$5.40 = 133 1/3 hours. I think even I would rather spend 100 hours on my roof than 133 1/3 hours in front of a class. And I'm afraid of heights!

There is a serious misallocation of labor when the productive market exchange - your clerical work for your roofer's labor - is eliminated; but because of the high marginal tax rate, it pays far you to work less at your regular job (at which you are presumably good) and more at household tasks (at which you are not so good). When you add up all the productive market exchanges short-circuited by high marginal tax rates, you may well be talking about hundreds of billions of dollars in misallocated resources.

17.2 Read texts 19, 20, 21 more carefully and point out the true statements:

  1. Supply - siders felt the federal government played too small an economic role.

  2. The work effect, the savings and investment effect and the elimination of productive market exchanges cause undesirable side effects of high marginal tax rates.

  3. High marginal tax rates deprive people both of some expected revenue and desire to work overtime.

  1. High marginal tax rates discourage working, saving and investing.

  1. According to the supply-siders lagging demand for imported goods and services resulted from high marginal tax rates.

  1. High tax rates discourage productive market exchanges.

  1. Define the key sentence of each paragraph in text 19 and translate them in written form.

  1. Sum up what text 20 says about the saving and investment effect.

  1. What paragraph of text 21 contains the most important information? Defend your choice using the key words.

18.1 Read text 22. Define the questions discussed in the text.

TEXT 22