COMPENSATORY TAX POLICY
IN the previous chapter we have discussed how private investment and governmental expenditures may affect the national income. We have examined the theoretical principles determining the leverage of such expenditures upon the national income and the necessity for the continuation of such expenditures in order to sustain the national income. In this chapter we consider particularly cyclical aspects of compensatory fiscal policy.
First, we concern ourselves with compensatory policy in a society which is sufficiently dynamic in terms of its private investment outlets to develop vigorous booms. What sort of tax policy is best designed to minimize cyclical fluctuations in a society which, except for periodic depressions, tends toward full employment of resources? We are thus concerned primarily with the question of a cyclical tax policy designed to minimize industrial fluctuations.
Comparison may be made between the cyclical fluctuations in a highly dynamic, high-savings economy and those in a less dynamic society which has at the same time achieved, through its fiscal policy or otherwise, a high level of consumption in relation to income--a high propensity to consume. The former will tend to have a violently fluctuating cycle; the latter a mild cycle. Both, we assume, tend toward full employment in the prosperity phase.
Chart 19 represents the consumption functions which fulfill the conditions stated. "A" represents the consumption function in a high-savings society; "B" the consumption func