The video by Fraser explores an essential concept on how income and spending correlate. According to the video, consumer spending habits follow the permanent income theory. The theory holds that consumers will always be reluctant to reduce or increase spending in response to income changes (The Fraser Institute, 2020). However, if they perceive the change is permanent and will persist, they respond by changing their spending habit.
Similarly, the theory can apply to tax changes. Reduction of tax affects the behavior of businesses and individuals via substitution effects and tax. This is because consumers are more likely to change their spending behavior if they discern the tax changes will persist. Tax cut increases after-tax rewards on saving, investing, and working. Besides, consumers consider the temporary from permanent changes in taxes, but they also predict the effect of the tax change on their income. Hence, consumers would begin to reshape their spending when long-term taxation laws are outlined or implemented (The Fraser Institute, 2020). Certainly, view the long-term advantage, then the taxation changes in the structure of legal liabilities would influence the habit of spending. However, in another perspective, a permanent tax would increase wealth or income, ultimately reducing the need to save, invest, and work, thus lowering the economy.
References
The Fraser Institute. (2020). Essential Milton Friedman: The Permanent Income Hypothesis and Policy Implications. YouTube. https://www.youtube.com/watch?v=GNFWCqJRZWg
