Illinois Tax Increase: Pros and Cons
Today, Illinois decided to increase the flow of funds from the people and businesses, to the state, to the tune of over $6 billion this year. That money will in turn be used to continue to employ people.
In theory, this is a good idea. The $6 billion might have otherwise been spent on products, and a major percentage of that money would have flowed out of Illinois, as many products spent with marginal income are undoubtedly imports.
Thus, the benefit would be that the money would instead flow back to the people, who would provide products desired by the public, and these people in turn would spend that same money back into the economy.
Actually, it sounds like quite a brilliant plan, it only it were as just described.
How could this be wrong?
In this case, the money by the public employees would go to servicing debt, especially mortgages, and so at least 25% of that money would vanish into the banks. In other words, $1.5 billion or so would end up in the banks. If this money were not flowing to the banks, then there would be lay offs, and pay cuts, and many more people would be unable to afford their homes, and foreclosures would increase.
Is it a catch-22 situation?
If the banks do not get the $1.5 billion then the houses will be foreclosed, and the home prices will fall, and more people will walk away, and more debt will be written down, and the odds of a major financial event will increase.
If the banks do get the $1.5 billion, then this money will leave the economy, as the banks will hold on to it to make up for other losses of loan assets, which will decrease the overall money supply, leading to less money for spending in the private sector, leading to more job losses in the private sector, and thus eventually leading to more foreclosures in the private sector, and now see above.
There is a question here though of the exact timing of this, as to which scenario is actually the better one.
Reference
http://www.google.com/hostednews/ap/article/ALeqM5jI3jTZiYrc6V_stsxAHpPYBI_pWQ?docId=9483a2777de34a64b3f2ac5e16c8d22c
In theory, this is a good idea. The $6 billion might have otherwise been spent on products, and a major percentage of that money would have flowed out of Illinois, as many products spent with marginal income are undoubtedly imports.
Thus, the benefit would be that the money would instead flow back to the people, who would provide products desired by the public, and these people in turn would spend that same money back into the economy.
Actually, it sounds like quite a brilliant plan, it only it were as just described.
How could this be wrong?
In this case, the money by the public employees would go to servicing debt, especially mortgages, and so at least 25% of that money would vanish into the banks. In other words, $1.5 billion or so would end up in the banks. If this money were not flowing to the banks, then there would be lay offs, and pay cuts, and many more people would be unable to afford their homes, and foreclosures would increase.
Is it a catch-22 situation?
If the banks do not get the $1.5 billion then the houses will be foreclosed, and the home prices will fall, and more people will walk away, and more debt will be written down, and the odds of a major financial event will increase.
If the banks do get the $1.5 billion, then this money will leave the economy, as the banks will hold on to it to make up for other losses of loan assets, which will decrease the overall money supply, leading to less money for spending in the private sector, leading to more job losses in the private sector, and thus eventually leading to more foreclosures in the private sector, and now see above.
There is a question here though of the exact timing of this, as to which scenario is actually the better one.
Reference
http://www.google.com/hostednews/ap/article/ALeqM5jI3jTZiYrc6V_stsxAHpPYBI_pWQ?docId=9483a2777de34a64b3f2ac5e16c8d22c