Taxation Basics

Progressive, proportional, and regressive.

1. Progressive tax
   A Progressive tax is a tax where the marginal tax rate (MTR – see below) increases progressively as income increases. The increases in the marginal tax rate usually occur in steps, so each time gross income exceeds a predetermined threshold, the tax on the next dollar will be at the next marginal tax rate. Alternatively, the marginal tax rate may increase progressively as the total gross annual income earned increases.
   
2. Proportional tax
   A Proportional tax is a tax where the tax paid is at a fixed rate so the total tax collected is directly proportional to the income earned. The marginal tax rate does not increase or decrease as gross income increases. A proportional tax is also known as a uniform tax or flat tax.
   
3. Regressive tax
   A Regressive tax is a tax where the marginal tax rate (MTR) decreases progressively as income increases. The tax decreases may occur in steps at specific thresholds or in direct relationship to the gross income earned.

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The effective tax rate is the rate at which tax is paid on total income.

The Effective Tax Rate (ETR) is the average or effective rate at which tax is paid on total annual gross income. It is usually expressed as a percentage,

With a progressive income tax, the Effective Tax Rate paid on total income may be significantly lower than the Marginal Tax Rate paid on the last dollar earned.

With a proportional tax, the Effective Tax Rate will be the same as the tax rate or marginal tax rate. 

With a regressive tax, the Effective Tax Rate may be higher than the marginal tax rate.

When a tax-free Basic Income is paid, the Effective Tax rate will be lower than the Marginal Tax Rate paid on the last dollar earned.

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The Marginal Tax Rate (MTR) is the rate at which tax is paid on income earned between two predetermined gross income thresholds, but is often a reference to the rate at which tax is paid on the last dollar earned.

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The Effective Marginal Tax Rate (EMTR) is the effective tax rate paid on the last dollar earned when other payments, deductions, or abatement of state grants are considered to be equivalent to additional tax paid.

The Effective Marginal Tax Rate (EMTR) will be higher than the Marginal Tax Rate when there are other deductions and may, in some cases, exceed 100%. When the EMTR exceeds 100%, earning extra income will result in a net reduction in income. This is a poverty trap.

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High Effective Marginal Tax Rates (EMTRs) can be a major disincentive to work, and may result in increased tax avoidance or non-disclosure of work income and encourage a cash economy where employment is paid in cash to avoid income taxes.

• Despite this, New Zealand welfare benefits, including Jobseeker Support, are paid in conjunction with a 70% abatement rate.
• This high abatement rate produces Effective Marginal Tax Rates (EMTRs) of 80.5% (70% abatement + 10.5% income tax) or 87.5% (70% abatement + 17.5% income tax) before the Jobseeker Support payment is fully abated.
• When the abatement of the Living Allowance at 25% is added, the resulting EMTRs are 105% and 112.5%.
  • In other words, for every dollar earned a person may lose a dollar and 5 cents, or a dollar and 12.5 cents!
• EMTRs may exceed these figures when transport, clothing, and other costs associated with work are included. 
• The very high EMTRs faced by those with low work incomes are well above the EMTRs faced by those with higher incomes.  This is highly regressive.
• High EMTRs are a major disincentive to work. People are penalised for working!
• High EMTRs create a poverty trap that results in reduced net income for those who move from unemployment to part time work or paid employment at the minimum wage.
• Consequently, high EMTRs are a major disincentive to work and may result in increased tax avoidance or non-disclosure of work income and encourage a cash economy where employment is paid in cash to avoid income taxes.

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As a general rule, a regressive tax is not recommended for use with or without a Basic Income, as it will penalise those on low incomes with higher tax rates while rewarding those on higher incomes with lower tax rates.

• A regressive tax increases the transfer of wealth from those who have little to those who have a lot.
• High tax rates on those with low incomes can be a major disincentive to work and encourage tax avoidance or evasion.
• High initial tax rates may encourage the cash economy, where low-income earners do not declare their earnings.

Nevertheless, a modestly higher initial tax rate might be used in conjunction with a Basic Income in a special case of a three-stage tax to improve the targeting and lower the cost of a Basic Income scheme (see three-stage tax below).

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Some Basic Income advocates suggest that those who receive a Basic Income should have their total income taxed at a rate that is directly proportional to their income.

• This is a proportional tax, also known as a uniform or flat tax.
• Paying a Basic Income that is equal for all, regardless of other income, together with a proportional tax on all income that is equal for all, results in a progressive effective tax rate (ETR).
• A proportional tax increases the tax rates on lower incomes and may lower the rates on higher incomes.
  • Increased tax rates on lower incomes will increase the tax paid by all income earners and increase government tax revenue.
  • Lower taxes on high incomes only benefit those with high incomes and reduce government tax revenue.
  • Those on very high incomes may gain a net overall benefit from the lower taxes on high incomes than they have to pay in additional taxes at the lower income end.
• Increasing the tax rates on the lower income bands increases government revenue that may be used to pay the Basic Income while abating the Basic Income so that those with higher incomes receive a reduced benefit from the Basic Income.
• In New Zealand, on October 1, 2010, the maximum marginal tax rate was reduced from 38% to 33% and GST increased from 12.5% to 15%. On April 1, 2021, the maximum marginal tax rate was increased from 33% to 39% for those earning over $180,000.
  • Between October 1, 2010 and April 1, 2021, the maximum marginal tax rate in New Zealand was 33%.
  • With a Basic Income, a 33% proportional tax during that period would ensure that those with little or no other income benefited the most from the Basic Income, while keeping the overall cost of the scheme low.
    • However, in April 2021, the maximum rate for those earning more than $180,000 was raised to 39%.
    • Adopting a 33% proportional tax after April 2021 is not recommended, as it would give a tax cut to high-income earners and reduce government revenue from high-income earners.
• To prevent tax cuts for high earners, the proportional tax rate must be set at the highest marginal tax rate of the progressive tax system it replaces.
  • A high proportional tax rate to prevent tax cuts for high-income earners may result in excessive tax rates for low and middle-income earners and encourage tax avoidance and evasion..

An alternative to a proportional tax with a Basic Income is a simplified progressive tax scale with fewer steps than the present progressive tax scale, possibly two or three.

Using a two or three-stage tax can improve the targeting of the Basic Income toward those on low incomes, avoid excessive tax rates for low to middle-income earners, and avoid tax cuts for high-income earners.

A two or three-stage tax is now a preferable option. Other options are also possible.

See two-stage tax and three-stage tax below.

See Tax and Basic Income for more details.

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An alternative to a proportional tax used with a Basic Income is a simplified progressive tax scale with a smaller number of steps, possibly two or three.

This will ensure that the Marginal Tax Rate (MTR) is never less than the present Marginal Tax Rate for any given taxable income, excluding other benefits.

In New Zealand, the maximum marginal tax rate for income tax was reduced from 38% to 33% on 1 October 2010 and then raised to 39% in April 2021.

• With the present New Zealand progressive tax scheme, the marginal tax rate increases from 33% to 39% at $180,000.
• Implement a two-stage tax system: 33% on income up to $180,000 and 39% on income above that, will prevent tax cuts for high earners and protect government revenue.
• Such a two-stage tax would ensure that everyone benefits from the Basic Income while avoiding tax cuts.
• Other countries introducing a similar initial tax rate may find that three or more tax rates are required to match current higher marginal tax rates.

However, a three-stage tax with a higher initial tax rate, a lower middle-income tax rate, and a higher final tax rate can further improve the targeting of the Basic Income, reduce the cost of the scheme, and ensure that the scheme does not give undue tax cuts to high-income earners.

See: Three-stage alternative below.

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To prevent tax cuts, a three-stage tax can be applied in countries with two tax rates higher than the one proposed for low to medium incomes.

Some Basic Income advocates have suggested using a three-stage tax alternative where the first stage uses a higher marginal tax rate, the second stage a lower marginal tax rate, and the third stage a higher marginal tax rate. The first and third tax rates may or may not be the same.

• A three-stage tax of this nature will abate the Basic Income with an initial higher tax rate as other income increases, provide a lower tax rate for those with middle incomes, and a higher tax rate for those with higher incomes.
  • This improves the focus of the net benefit of the Basic Income to those with low incomes.
• Focusing the net benefit this way minimises the total net cost of a Basic Income scheme and reduces the need to increase other taxes.
• A higher number of stages is also possible, but this is likely to unnecessarily complicate the tax scheme.
  • An objective of a Basic Income scheme is to simplify the tax scheme.

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People’s incomes and pay rates tend to increase with time due to inflation. If the tax margins are not increased in line with inflation, people will end up paying a greater percentage of their income in taxation. As a result, real incomes after tax reduce.

• When the economy is doing well, governments, even when they increase expenditure in line with inflation, may end up with surpluses.
• One reaction is to talk of tax cuts, but Basic Income is a better alternative.
• In difficult times, government expenditure may exceed income, and the government incurs a deficit. 
• Again, some people call for tax cuts to boost the economy. However, the proven link between tax cuts and a boost to the economy is very, very dubious.
  • A Basic Income is a better alternative because it will boost both the economy and government revenue.
• When applied correctly with an appropriate tax regime, a Basic Income is a better alternative to tax cuts because it targets the money toward those most in need of income while maximising the boost to the economy. 
• There are two ways taxes may be cut. 
• The first method is to increase the tax margins or thresholds, the point where the tax-rate changes from one tax rate to the next, while leaving the rates unchanged.
  • This method is usually justified as being necessitated by inflation or as a way of reducing a surplus. 
• The second method is to reduce the tax rates.
  • This may occur if the government still has an annual surplus after the first method has been applied. 
• Whichever method is applied, those with no income will receive no benefit, and the benefit will progressively increase until income reaches $180,000 (New Zealand).
  • Those who receive the greatest tax reduction in total dollars will always be those with incomes in the highest tax bracket. This is currently those with incomes greater than $180,000. 
• With a progressive tax system, tax cuts, even when restricted to the lower margins and rates for the lowest incomes, are not a good method of targeting the benefit of the cuts to those on the lowest incomes.
  • This is because those on lower incomes will receive only part of the benefit of the tax cuts while those on higher incomes will always receive the full benefit. Tax cuts invariably favour those on high incomes or the wealthy.
• A Basic Income is a more efficient way of distributing value to those with the lowest incomes, as explained on the Tax and Basic Income page.
   
• The following is reproduced from Realising a Basic Income 2022 by Iain B Middleton. The full paper is available on the Resources page.  
• Tax cuts are often portrayed as a means of boosting an economy when there is an economic downturn, but there is little real evidence that this works in practice. In 2012, L. Hungerford, in a US Congressional Research paper looking at tax rates from 1945, concluded that:
  • The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.(7, 8)
• In 2022, Cloyne, Martinez, Mumtaz, and Surico, in a National Bureau of Economic Research working paper, reported that:
  • Personal income tax cuts trigger a short-lived boost to GDP, productivity and hours worked but have no long-term effects.(9)
• Rather than boost the economy, tax cuts may achieve the opposite. Economic downturns often follow tax cuts. Reductions in government tax revenue resulting from the tax cuts often lead to cuts in government spending to match the fall in revenue. The spending cuts further reduce economic activity, which reduces government revenue further, leading to further tax cuts, and so on. Cuts in government spending accentuate economic downturns. The reduction in economic activity during an economic downturn impacts on the poor but also reduces company profits and the incomes of those who have plenty. When the poor have little money to spend, companies suffer, profits reduce, and there is pressure on those with higher incomes.

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No

A personal tax exemption is an amount that people are allowed to earn before they are taxed. It is a special case of a tax cut where the tax on the first income band is reduced to zero.

• The suggestion is that those on low incomes will benefit from being able to work and earn a relatively low income before being taxed. For example, the first $500, $1,000, or $2,000 per week earned may be tax-free. These amounts are equivalent to $26,089, $52,178, or $104,355 per annum.  
• However, as the total annual tax that an individual pays is calculated on their total annual income, a personal tax exemption is subtracted from the total annual income earned before the annual tax is assessed. This means that the tax savings a person receives will be calculated at their marginal tax rate – the rate that their last dollar earned is taxed.  
• Thus, a person on a low income will have their tax savings calculated at 10.5 cents in the dollar, while those on the highest incomes will have their tax saving calculated at 39 cents in the dollar.  
• This means that a personal tax exemption will always benefit the wealthy more than the poor.  
• Personal tax exemptions tend to be expensive from the government’s perspective due to the loss of tax revenue.
  • The benefit of the tax exemption is targeted toward the wealthy rather than the poor.
  • This is the exact opposite of what a Basic Income does.
  • Introducing a personal tax exemption with a Basic Income undermines the Basic Income.  
• For example, for a small tax-free personal allowance of $1,000 per annum:
  • With a uniform tax:
    • Those who earn no income will receive no additional income from the proposal.
    • Additional income after tax will progressively increase up to the threshold of $1,000, where incomes begin to be taxed.
    • All those earning more than the tax-free threshold will receive the maximum increase in income.
      • With a uniform tax of 33% the maximum increase in income is $330.
      • Note, those who previously had an MTR of 39% will also receive a 6% tax cut to their MTR with the change to a 33% uniform tax.
  • With the current progressive tax system, a personal tax exemption of $1,000 per annum will produce the following results in annual figures:
    • Those with no other income will receive no benefit from the personal tax exemption.
    • Those with an MTR = 10.5%, will be $105 better off.
    • Those with an MTR = 17.5%, will be $175 better off.
    • Those with an MTR = 30%, will be $300 better off.
    • Those with an MTR = 33%, will be $330 better off.
    • Those with an MTR = 39%, will be $390 better off. 
• In another example, if the first $500 per week was to be made tax-free, that is a personal tax exemption of $500 per week or $26,089 per annum, those who have no income will receive no benefit while those in the highest tax bracket of 39 cents in the dollar (over $180,000 per annum) will receive a tax reduction of $10,174.71 per annum. Thus, the personal tax exemption is in reality a tax reduction aimed at the highest-income earners.  
• The results above show that the benefit to an individual of introducing a personal tax exemption increases progressively in steps as annual income increases. While those on low incomes may gain more as a percentage of their annual incomes than those on higher incomes, those who gain the most benefit in absolute dollars from a personal tax exemption are those who earn the most. The benefit goes to those who need it the least. 
• Thus, it is seen that personal tax exemptions target money toward those who earn more, and this holds true for both a progressive tax system and a uniform tax above the personal tax exemption threshold. Personal tax exemptions give more to the wealthy than to the poor and considerably increase the cost of a Basic Income scheme that includes a personal tax exemption. 
• In contrast, A Basic Income coupled with an appropriate tax works better by ensuring that the maximum benefit is received by those with the lowest incomes, with the increase in net income reducing as gross income increases. This ensures that money is targeted toward those most in need. See Tax and Basic Income for more details.  
• In his book, Basic Income: And How We Can Make it Happen, Pelican 2017, Guy Standing shows how countries with personal tax exemptions can achieve significant tax increases by abolishing the personal tax exemptions and that this increase in revenue may be used to partially fund a Basic Income. Standing notes:
• “While raising the personal tax allowance has been presented as a measure to help low earners, high earners gain most of the benefit because more of their income escapes tax, and there are knock-on increases in the level of earnings at which higher rates of tax kick in. Meanwhile, low earners already below the threshold gain nothing.”  
• Abolishing a personal tax exemption and using the money to pay a Basic Income would increase the net revenues of those on lower incomes and improve the targeting of the money toward those on lower incomes. 
• New Zealand abolished personal tax exemptions during the 1980s and it would be unwise to reintroduce them now as personal tax exemptions produce results that counter the benefits of a Basic Income, and further increase the wealth of the wealthy while doing less for the poor than a Basic Income would.  
• Other forms of tax cuts, such as reducing tax rates or increasing tax thresholds, will also reward the wealthy more than those on lower incomes and are not desirable for the same reasons. A Basic Income works better. 
• Another way to look at a progressive tax is to consider it as a uniform tax with a series of tax cuts or discounts applied to the lower-income steps.
  • As each tax cut will benefit those on higher incomes more than those on lower incomes, the result is a tax system that provides significant and more benefit in absolute dollars to those on higher incomes.
  • There is also a loss of government tax revenue due to the lower taxes raised on the lower income steps.
  • To counter this loss of revenue, the government must increase the taxes on higher-income bands. But, because all or most taxpayers benefit from the tax cuts on the lower bands and only a minority of taxpayers pay tax on income in the high-income bands, the percentage increases in tax on the high-income bands must be significantly more than the percentage reductions on the low-income bands.
  • The very high Marginal tax rates (MTRs) that result are likely to lead to tax avoidance and tax evasion.
  • A better Net to Gross income profile can be achieved by combining a Basic Income with a tax system with fewer steps.  
• A Basic Income is a more efficient way of distributing value to those with the lowest incomes, as explained on the Tax and Basic Income page. 

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Assume a progressive tax system with the threshold for the maximum marginal tax rate at $180,000. As the progressive tax system gives an effective tax discount on the first $180,000 of income, converting to a proportional tax usually involves removing the discounted or lower tax rates so that all income is taxed at a higher marginal tax rate.

In New Zealand, this may be a proportional tax in the range of 33% to 39%.  

• Changing to a proportional tax of either 33% or 39% without some form of compensation for those on lower incomes will significantly hurt those on low incomes.
  • With a 33% proportional tax, those with low incomes will have a 22.5% tax rate increase, from 10.5% to 33%.
  • With a 39% proportional tax, those with low incomes will have a 28.5% tax rate increase, from 10.5% to 39%.
  • This increased tax is offset by providing a Basic Income. 
•  Reducing the proportional tax rate to less than 33%, to say 30% in an attempt to benefit those on low incomes will, however, give those with incomes between $78,100 and $180,000 a 3% cut in marginal tax, and those with incomes over $180,000 a 9% cut in marginal tax while still significantly increasing the tax on those with the lowest incomes.
  • With a 30% proportional tax, those on an income of $180,000 or greater at present will receive a 9% cut in their marginal tax rate.
  • Changing to a proportional tax without a Basic Income will hurt those on low incomes and will benefit people on high incomes.
• Changing to a proportional tax of 33% will result in a person on a minimum income of $23.50 per hour (p.h.),  $49,047 per annum (p.a.), paying an additional $8,694 p.a. (116%) in tax.
  
  Those with incomes between $78,101 and $180,000 will pay an additional $10,122 in tax (64.68% for those on $78,000 and 20.54% for those on $180,000) in tax.
  • The percentage increase in tax declines as income increases and eventually becomes negative.
• A change to a proportional tax will give the greatest percentage increase in tax to those on the lowest incomes, while making very little difference in total taxation as a percentage to those on very high incomes.
  • Without a Basic Income, a change to a proportional tax favours the wealthy while driving those on low incomes into poverty.
  • Without a Basic Income, this is a regressive change as it hits those on lower incomes harder than those on higher incomes. 
• Because a change to a proportional tax hits those on the lowest incomes hard while having little impact on the wealthy, a change to a proportional tax without a Basic income should not be contemplated. 
• However, when a proportional tax is combined with a Basic Income, a desirable outcome is achieved. This will be demonstrated in more detail on the Tax and Basic Income page.

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In New Zealand, a Basic Income is usually regarded as income, not an allowance payable to cover costs. Consequently, it is considered a taxable payment.

• NZ Superannuation, a Basic Income type payment, is a taxable payment.
• Welfare payments, such as Jobseeker Support, are considered income and are taxable.
• A taxable Basic Income allows for Broad Targeting of a Basic Income, and this reduces the overall net cost of a Basic Income scheme.
• Because Basic Income payments are additional income for those with other income, the Basic Income payments are taxed at the recipient’s highest marginal tax rate.
  • Consequently, with a progressive tax, those with little other income will have their Basic Income payments taxed at a lower marginal tax rate.
  • Those with high incomes from other sources will have their Basic Income taxed at a high marginal tax rate. They will pay more in tax on their Basic Income than those with low incomes from other sources.
  • This achieves Broad Targeting of the Basic Income toward those on the lowest Incomes, and lowers the overall cost of a Basic Income scheme.

What happens if a Basic Income is made tax-free?

• With a uniform tax, all recipients receive the same net amount, and no targeting is achieved.
• If the payment is set at the same amount as the net amount that a person with no other income would receive with a taxable scheme as described above, the total cost of the scheme will be larger than for a taxable Basic Income scheme.
  • Consequently, to raise the same total amount in tax, it is necessary to increase the tax rates on other incomes to a greater extent than is required with a taxable Basic Income.
  • To achieve the same degree of Broad Targeting, the tax rates on higher incomes must be increased to a greater extent than is required with a taxable Basic Income.
  • Because the cost of a tax-free Basic Income scheme is higher than for a taxable Basic Income scheme, it may be necessary to find other sources of tax income to compensate.

In summary:

• A taxable Basic Income with a suitable progressive tax provides Broad Targeting and lowers the overall cost of the scheme.
• A tax-free Basic Income increases the cost of a scheme and either requires higher tax rates on other income or alternative taxes to compensate.

For these reasons, a taxable Basic Income is preferable.

New Zealand has a five-step progressive Income tax system. Tax rates increase progressively as income increases.

Scroll down to see present and past tax rates.

The current rates and thresholds are:

From 31 July 2024 Tax reduction.

A person with an income greater than $180,001 will have:

1. the first $15,600 taxed at 10.5% and
2. the next $37,900 at 17.5%,
3. the next $24,600 at 30%,
4. the next $101,900 at 33%, and
5. all income over $180,000 taxed at 39%.

These are the marginal tax rates – the tax rate at which the last dollar earned is taxed. A person’s marginal tax rate may be 10.5%, 17.5%, 30%, 33% or 39% depending on a person’s income.

1. A person earning less than $15,600 has
   a marginal tax rate of 10.5%.
2. A person earning between $15,601 and $53,500, has
   a marginal tax rate of 17.5%,
3. A person earning more than $53,501 but less than $78,100,
   has a marginal tax rate is 30%,
4. A person earning more than $78,101 but less than $180,000, has a marginal tax rate of 33%,
5. A person earning more than $180,000 has a marginal tax rate of 39%.

The effective tax rate (ETR) is often considerably less than the marginal tax rate (MTR). A person earning more than $180,000 with a marginal tax rate of 39% is likely to have an effective tax rate less than 25%.

One objective of a Basic Income scheme is to simplify the tax scheme by reducing the number of tax steps.

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To estimate the total Basic Income payments, or the net cost of a Basic Income scheme, for a country, it is necessary to know the number of people in each payment group. Countries hold a census, perhaps every five years. For other years, population estimates are required.

To make total Basic Income payment estimates as accurate as possible, it is necessary to estimate the population for each age group from the previous census proportionately.

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The Marginal Propensity to Consume (𝑀𝑃𝐶) is the proportion of an increase in income that an individual spends on consumption rather than saving. It is calculated by dividing the change in consumption by the change in disposable income

(𝑀𝑃𝐶=Δ𝐶/Δ𝑌).

• For example, if someone receives an extra $100 and spends $75 of it, their 𝑀𝑃𝐶 is 0.75.

This is a key concept in economics, as it helps forecast how much additional money will flow through the economy. 

How it works

• Formula: The basic formula is
  𝑀𝑃𝐶=Change in Consumption/Change in Income. 
• Example: If you receive a $600 bonus and spend $400 on a new couch, your 𝑀𝑃𝐶 is $400/$600, or approximately 0.66. 
• Key takeaway: An 𝑀𝑃𝐶 of 0.75 means that for every extra dollar earned, 75 cents will be spent on consumption and the remaining 25 cents will be saved. 

Factors that influence 𝑀𝑃𝐶

• Income level: Individuals with lower incomes generally have a higher 𝑀𝑃𝐶, as a larger portion of their income is spent on essential goods and services. 
• Consumer confidence: People are more likely to spend more when they are confident about the future of the economy. 
• Availability of credit: When credit is more accessible and interest rates are lower, people are more inclined to spend rather than save. 

Relation to Marginal Propensity to Save (𝑀𝑃𝑆):

The Marginal Propensity to Save (𝑀𝑃𝑆) plus the marginal propensity to consume (𝑀𝑃𝐶) always equals one, or 100%. This is because any extra dollar of income is either saved or spent. 

• Example: If the 𝑀𝑃𝑆 is 0.30, the 𝑀𝑃𝐶 must be 0.70, (1−0.30=0.70). 
• Formula: 𝑀𝑃𝐶+𝑀𝑃𝑆=1

Importance in economics

Monetary policy: Central banks consider 𝑀𝑃𝐶 when setting interest rates. Lowering interest rates can encourage spending, especially if the 𝑀𝑃𝐶 is high. 

Economic growth: 𝑀𝑃𝐶 is used to understand and support economic growth by showing how much additional consumer spending will occur with an increase in income. 

Government policy: Governments use this concept to predict the impact of policies like tax cuts. For instance, a tax cut for low-income households is likely to boost consumption more than a tax cut for high-income households because their 𝑀𝑃𝐶 is higher. 

A Basic Income, broadly targeted toward those on lower incomes, will increase the 𝑀𝑃𝐶, boost consumption, the velocity of money, and GDP through the multiplier effect, and increase government tax revenue.

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The Marginal Propensity to Save (𝑀𝑃𝑆) is the proportion of any additional income that a person saves rather than spends.

For example, if someone saves 30 cents of every extra dollar they earn, their 𝑀𝑃𝑆 is 0.30 or 30%. It is calculated by dividing the change in savings by the change in income and is a key concept in economics.

How it works

• Calculation:
  • To find the 𝑀𝑃𝑆, divide the change in savings by the change in income. 
  • Formula: 𝑀𝑃𝑆=Change in Savings/Change in Income. 
  • Example: If a person receives a $100 payment and saves $30 of it, their 𝑀𝑃𝑆 is $30/$100=0.30. 
• Relation to Marginal Propensity to Consume (𝑀𝑃𝐶): The 𝑀𝑃𝑆 plus the marginal propensity to consume (𝑀𝑃𝐶) always equals one, or 100%. This is because any extra dollar of income is either saved or spent. 
  • Formula: 𝑀𝑃𝐶+𝑀𝑃𝑆=1. 
  • Example: If the 𝑀𝑃𝑆 is 0.30, the 𝑀𝑃𝐶 must be 0.70,
    (1−0.30=0.70). 
• Economic significance:
  The 𝑀𝑃𝑆 is a crucial concept in economics because it helps determine the size of the multiplier effect. The multiplier effect describes how an initial change in spending can lead to a larger overall change in economic activity. A lower 𝑀𝑃𝑆 (meaning a higher 𝑀𝑃𝐶) results in a larger multiplier, as more money is re-circulated through spending in the economy.
  • Savings behaviour: The 𝑀𝑃𝑆 helps economists understand how households behave when they receive more income. 
  • Multiplier effect: The 𝑀𝑃𝑆 is crucial for determining the value of the economic multiplier, which measures the impact of changes in spending on overall economic output. 
  • Leakage from the economy: A higher 𝑀𝑃𝑆 means more money is being saved and not spent on goods and services, which is considered a “leakage” from the economy. Leakage also occurs when money is spent on goods manufactured overseas, invested overseas, or spent on overseas travel.

With a Basic Income, those on higher incomes are more likely to save the extra money rather than spend it, increasing 𝑀𝑃𝑆, reducing consumption (𝑀𝑃𝐶), reducing the velocity of money, reducing GDP and the multiplier effect, and reducing government tax revenue.

However, a Basic Income that is broadly targeted toward those on lower incomes will increase the 𝑀𝑃𝐶, boost consumption, boost the velocity of money, and GDP through the multiplier effect, and increase government tax revenue.

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The Velocity of Money measures the rate at which a unit of currency is used for transactions within a specific period.

In simple terms, it tracks how often money changes hands in an economy. 

Definition and Formula

Velocity provides insight into how efficiently money is being utilised to facilitate economic activity.

It is typically calculated using the Equation of Exchange (MV = PQ), which can be rearranged to define velocity: 

V=GDP/M

where:
V = Velocity of Money
GDP = Nominal Gross Domestic Product(GDP)
M = Money Supply (M)

A high velocity indicates a vibrant and active economy where money circulates quickly, while a low velocity suggests stagnation or reduced economic activity, as people and businesses tend to hold onto cash. 

Influence of Marginal Propensities

The velocity of money is directly influenced by the public’s desire to spend versus save, which is quantified by the Marginal Propensity to Consume (𝑀𝑃𝐶) and the Marginal Propensity to Save (𝑀𝑃𝑆).

• Marginal Propensity to Consume (𝑀𝑃𝐶): A higher 𝑀𝑃𝐶means that consumers spend a larger portion of their additional income.
  • This rapid spending causes money to change hands more frequently throughout the economy, which leads to higher velocity.
• Marginal Propensity to Save (𝑀𝑃𝑆): A higher MPS means that consumers save or hoard a larger portion of their additional income.
  • The money is withdrawn from the immediate spending stream, slowing down the frequency of transactions and leading to lower velocity. 

In essence, consumer behavior is a key determinant of velocity:

• When people are optimistic about the economy (often associated with a high 𝑀𝑃𝐶), they spend more freely, increasing velocity.
• During times of economic uncertainty (associated with a high 𝑀𝑃𝑆), people save more and reduce spending, decreasing velocity. 

Therefore, the relationship is such that higher consumption propensity increases velocity, while higher saving propensity decreases it.

A Basic Income that is broadly targeted toward those on lower incomes will increase the Marginal Propensity to Consume (𝑀𝑃𝐶) and the Velocity of Money.

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The Multiplier Effect describes how an initial change in spending or investment leads to a proportionally larger change in the overall national income or Gross Domestic Product (GDP). This is because the initial spending creates a chain reaction of further spending throughout the economy. 

How the Multiplier Effect Works

The process works in a cycle:

• 1. Initial Injection: An initial amount of money is injected into the economy (e.g., government spending on Basic Income).
• 2. Income Generation: This spending becomes income for the immediate recipients (e.g., people with low incomes).
• 3. Secondary Spending: These recipients then spend a portion of their new income on goods and services (e.g., groceries, entertainment, new clothes).
• 4. Further Rounds: This secondary spending generates income for other businesses and individuals, who in turn spend some of their new income, and the cycle continues.
• 5. Overall Impact: Each round of spending is progressively smaller than the previous one because some income is saved, taxed, or spent on imports or overseas travel(known as “leakages”), but the total increase in income is a multiple of the initial injection.

Influence of Marginal Propensities

The size of the multiplier effect is critically influenced by the Marginal Propensity to Consume (𝑀𝑃𝐶 ) and the Marginal Propensity to Save (𝑀𝑃𝑆). These two propensities are the key determinants of how much of the additional income “leaks out” of the spending stream in each round. 

• Marginal Propensity to Consume (𝑀𝑃𝐶 ): The fraction of additional income that households choose to spend on consumption.
  • A higher 𝑀𝑃𝐶  means that more of the extra income is re-spent, leading to a larger ripple effect and a larger multiplier.
• Marginal Propensity to Save (𝑀𝑃𝑆): The fraction of additional income that households choose to save rather than spend.
  • A higher 𝑀𝑃𝑆 means that more income is withdrawn from the spending cycle in each round, leading to a smaller multiplier. 

Because any additional income is either consumed or saved, 𝑀𝑃𝐶 + 𝑀𝑃𝑆 always equals 1. 

The Multiplier Formula

The simple spending multiplier can be calculated using either the 𝑀𝑃𝐶 or the 𝑀𝑃𝑆: 

Multiplier=1/(1−𝑀𝑃𝐶) or

Multiplier=1/𝑀𝑃𝑆

Example:
If the 𝑀𝑃𝐶 is 0.8 (meaning people spend 80% of any new income and save 20%), the 𝑀𝑃𝑆 is 0.2.

The multiplier would be:

Multiplier=1/0.2=5

An initial injection of $1 million in government spending, in this case, would result in a total increase in national income of $5 million ($1 million * 5). 

In summary, the multiplier effect amplifies initial changes in spending, and the magnitude of this amplification is directly related to the 𝑀𝑃𝐶 and inversely related to the 𝑀𝑃𝑆. 

A Basic Income broadly targeted toward those on lower incomes will increase the aggregate Marginal Propensity to Consume (𝑀𝑃𝐶) and the Multiplier Effect.

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The velocity of money and the multiplier effect are related concepts that both describe how money circulates and generates economic activity, and in some economic models, they are considered to be proportional.

• The Multiplier Effect (a core economic concept) describes how an initial change in spending leads to a magnified change in overall national income.
  • This effect is driven by the Marginal Propensity to Consume (𝑀𝑃𝐶): the more people spend their new income (higher 𝑀𝑃𝐶), the larger the multiplier.
• The Velocity of Money (a core concept in the Quantity Theory of Money) measures the frequency at which the existing money supply changes hands in transactions over a specific period (Velocity = Nominal GDP / Money Supply).
  • A higher velocity means money is circulating faster and driving more transactions. 

Key Relationship Points:

• Synchronous Movement: The economic behaviours that increase the multiplier (higher 𝑀𝑃𝐶, lower 𝑀𝑃𝑆) are the same behaviours that increase the velocity of money (faster spending).
  • When consumers and businesses are confident and spend money quickly, both the multiplier and velocity tend to rise.
• Behavioral Link: Both concepts are fundamentally driven by consumer and business spending behaviour.
  • A high 𝑀𝑃𝐶 leads to a high multiplier because each dollar is re-spent multiple times in a chain reaction of income generation.
  • A high velocity means each existing dollar in the money supply is used more frequently in a given time period to purchase goods and services.
• Conceptual Equivalence in Some Models: In some specific theoretical frameworks of money circulation, the velocity of money can be mathematically equivalent or proportional to the multiplier, essentially being two different ways to measure the speed and impact of money circulation within the real economy.
• Monetary vs. Fiscal Focus: The money multiplier is often discussed in the context of central bank actions and the banking system’s ability to create new money through lending (monetary policy).
  • The spending multiplier is typically used in the context of government spending or tax changes (fiscal policy). However, the underlying principle of circulation is shared.

In summary, the velocity of money and the multiplier effect are closely related in that they both describe the rate and extent to which money facilitates economic activity. A higher propensity to consume (high 𝑀𝑃𝐶/low 𝑀𝑃𝑆) boosts both the velocity of circulation and the magnitude of the economic multiplier.

A Basic Income designed to boost the 𝑀𝑃𝐶 will boost both the velocity of money and the economic multiplier.

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A taxable basic income program that redistributes wealth from higher-income to lower-income individuals is expected to increase the aggregate Marginal Propensity to Consume (𝑀𝑃𝐶 ), increase the velocity of money, and increase the overall multiplier effect of government spending. 

Influence on the Marginal Propensity to Consume (𝑀𝑃𝐶 ) 

• Higher 𝑀𝑃𝐶 for Lower Incomes: Research consistently shows that households with lower incomes and fewer liquid assets have a significantly higher 𝑀𝑃𝐶 than wealthier households.
  • Lower-income individuals tend to spend a large proportion of any additional income on immediate necessities like food, housing, and basic goods because their basic needs are often unmet.
• Lower 𝑀𝑃𝐶 for Higher Incomes: Higher-income individuals are more likely to save or invest any extra income, as their basic consumption needs are already largely satisfied, resulting in a lower 𝑀𝑃𝐶 .
• Aggregate 𝑀𝑃𝐶 Increases: By shifting net income from those with a low 𝑀𝑃𝐶 (higher earners, through taxes) to those with a high 𝑀𝑃𝐶 (lower earners, through the basic income), the aggregate 𝑀𝑃𝐶 of the entire economy increases.
  • This is a form of fiscal redistribution that boosts overall consumption.

Influence on the Velocity of Money

The velocity of money measures how frequently a unit of currency is used in transactions within a specific period. 

• Increased Circulation: Because lower-income recipients have a higher 𝑀𝑃𝐶 and spend their additional income quickly on immediate needs, the money circulates faster through the economy.
• Higher Velocity: Money that is saved or invested by higher-income individuals (which would have been the case without the redistribution) has a lower velocity in terms of immediate consumption spending.
  • Therefore, redistributing income to those who spend it faster will lead to an overall increase in the velocity of money in the economy. 

Influence on the Multiplier Effect

The multiplier effect is directly tied to the 𝑀𝑃𝐶 (Multiplier = 1 / (1 – 𝑀𝑃𝐶 ) or 1 / 𝑀𝑃𝑆). 

• Larger Multiplier: As the aggregate 𝑀𝑃𝐶 of the economy increases due to the redistribution program, the value of the spending multiplier also increases.
  • Each initial dollar injected into the economy via the basic income generates more subsequent rounds of spending than it would if the income remained with high-income earners.
• Stimulated Economic Activity: The larger multiplier effect means that the redistributive policy provides a stronger boost to aggregate demand and national income for a given amount of initial fiscal stimulus, thus stimulating greater economic activity. 

Conclusion

A well-designed Basic Income scheme that targets the net increase in income toward those with the lowest incomes will increase the aggregate Marginal Propensity to Consume (𝑀𝑃𝐶), increase the velocity of money, and increase the overall multiplier effect. 

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 A well-designed basic income program, partially funded by an appropriate tax scheme and broadly focused on lower-income individuals, is expected to have a positive influence on GDP and GDP per capita, while its effect on government tax revenue is likely positive through self-financing mechanisms and increased economic activity. 

Influence on GDP and GDP per Capita

The basic income is expected to increase both GDP and GDP per capita due to the principles of the multiplier effect and velocity of money:

• Increased Aggregate Demand: By redistributing wealth to lower-income households, who have a higher Marginal Propensity to Consume (𝑀𝑃𝐶), the total spending in the economy increases significantly more than if the money remained with higher-income households (who have a lower 𝑀𝑃𝐶).
  • This boost in consumption directly stimulates aggregate demand, a key driver of GDP growth.
• Multiplier Effect Amplification: The increased aggregate 𝑀𝑃𝐶 leads to a larger economic multiplier.
  • Each initial dollar of basic income circulates through the economy more times, generating a proportionally larger overall increase in economic activity and national income.
• Long-Term Growth Factors: Beyond immediate consumption, the basic income can lead to long-term improvements in human capital, health outcomes, and financial stability for recipients, which can further boost productivity and thus GDP per capita over time.
• Economic Stimulus: Studies and economic models suggest that providing a basic income, particularly when targeting those below the poverty line, can boost GDP significantly, with some estimates suggesting several dollars of economic impact for every dollar invested. 

Influence on Government Tax Revenue

The influence on government tax revenue is complex but generally projected to be positive in the long run due to the dynamic effects of the policy:

• Automatic Revenue Generation: As the basic income increases spending (especially on goods and services), a portion of that money automatically returns to the government in the form of consumption taxes (like sales tax or GST).
• Income and Profit Taxes: The increased economic activity, local employment, and business profits generated by the spending boost lead to higher collections of income and profit taxes.
• Partial Self-Financing: The combination of increased consumption and income taxes often means a significant portion of the basic income program’s cost is recouped by the government through increased economic activity.
  • Some estimates suggest that this dynamic effect can be a substantial share of the initial outlay.
• Efficiency Gains: A well-designed basic income program that replaces complex, targeted welfare systems can also reduce administrative costs, making the overall government expenditure more efficient, which indirectly strengthens the fiscal position. 

While higher direct taxes on the wealthy can have a potential negative effect on their incentives to save or invest, the overall redistributive effect is expected to stimulate aggregate demand sufficiently to generate a net positive impact on both GDP and government revenue.

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A Basic Income broadly targeted toward lower-income individuals is consistently found to have a positive impact on physical health, mental health, and overall well-being. This, in turn, can lead to a decrease in government expenditure on healthcare. 

Impact on Physical Health

• Improved Nutrition and Diet: Basic income allows recipients to afford better and more nutritious food, leading to improved dietary outcomes and overall health.
• Access to Healthcare: The financial security from a basic income enables recipients to afford preventative care, necessary medical treatments, and medication that they may have previously neglected due to cost.
• Reduced Stress-Related Illnesses: Alleviating financial stress reduces the prevalence of chronic health conditions associated with prolonged stress, such as cardiovascular disease and high blood pressure. 

Impact on Mental Health and Well-being

• Reduced Anxiety and Depression: A large body of evidence from trials and studies consistently reports clear and significant improvements in mental well-being, including reductions in anxiety and depression.
• Increased Hope and Reduced Stigma: Recipients often report a renewed sense of hope for the future, improved time with family and friends, and a reduction in the perceived stigma often associated with poverty.
• Improved Life Satisfaction: Studies have linked basic income with improved overall subjective well-being and quality of life. 

Impact on Government Expenditure

Self-Financing Potential: When combined with other potential cost reductions (e.g., reduced crime rates and lower administrative costs of welfare programs), some models suggest that the healthcare savings alone could significantly offset the cost of the basic income program.

Reduced Healthcare Costs: By improving preventative care and reducing the mental and physical health issues associated with poverty, a basic income is expected to decrease the long-term burden on healthcare systems.

Fewer hospitalisations, emergency room visits, and chronic disease management costs could lead to significant savings for the government.

Shift from Reactive to Proactive Spending: The financial security provided by a basic income enables a shift from reactive spending (e.g., covering hospitalisations) toward proactive spending on wellness and preventative care, which is generally more cost-effective.

A well-designed Basic Income scheme will improve both physical and mental health, while improving well-being and reducing government costs.

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A basic income broadly targeted at lower-income individuals is expected to reduce crime rates by addressing economic deprivation, a major driver of criminal activity. By improving economic stability and opportunities, it can also decrease the appeal of gang affiliation. This crime reduction would, in turn, lower government expenditure on the justice system. 

Impact on Crime and Gangs

• Addressing Economic Drivers of Crime: Research has established a strong link between poverty, income inequality, and criminal activity.
  • A basic income would provide financial stability to those who might otherwise turn to crime out of desperation, hunger, or financial need.
  • By mitigating these economic pressures, the basic income can lead to a decrease in both property and violent crimes.
• Reduced Incentive for Gang Involvement: Gangs often provide a sense of belonging and a source of income or status for individuals, particularly youth, in areas with high poverty and limited opportunities.
  • By providing a stable income and a path toward a better future, a basic income could reduce the financial incentive and desperation that often drives people toward gang affiliation.
• Empowering Communities: The economic boost from a basic income can strengthen local communities, leading to better social cohesion and support systems.
  • This can help to address the underlying social issues that contribute to gang activity and create a more positive environment for youth development.
• Empirical Evidence: Some researchers have argued that providing targeted financial support can reduce crime rates, though more research is needed.
  • Additionally, studies on the link between poverty and crime show that reducing income inequality can lead to significant reductions in homicide and robbery rates. 

Impact on Government Expenditure

Reallocation of Funds: The savings from reduced crime-related expenses could be reallocated to other areas, such as education, healthcare, or infrastructure, further benefiting society. 

Lower Justice System Costs: A reduction in crime directly leads to lower government expenditure on the justice system. This includes costs related to policing, court proceedings, prisons, probation, and rehabilitation programs.

Efficiency Gains: A basic income program could replace or streamline complex, bureaucratic welfare systems, leading to reduced administrative costs for the government.

Long-Term Fiscal Savings: By addressing the root causes of crime, a basic income can result in long-term fiscal savings. Investing in prevention through a basic income could be more cost-effective than managing the consequences of crime after the fact.

Basic Income trials have consistently shown significant reductions in criminal activity and gang involvement, leading to reduced government expenditure.

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Funding a well-designed Basic Income (BI) scheme involves a combination of direct funding and direct and indirect cost savings.

The true net cost of a Basic Income is often significantly less than the gross outlay because of the self-financing nature of a Basic Income scheme and its positive economic and social impacts. 

Core Funding Mechanisms

The primary funding mechanisms for a basic income involve tax and welfare system reforms.

1. Replacement of Existing Welfare Payments.
   A Basic Income replaces various welfare benefits and subsidies of the same or smaller value with a single, unconditional payment and partially replaces larger payments.
   • It simplifies the welfare system by eliminating complex, means-tested benefits with high administrative costs.
   • A 2019 study in New Zealand estimated that a Basic Income at the jobseeker support level, without considering the savings, would cost NZ$41.3 billion annually, similar to the total spending on superannuation and welfare benefits in recent years.
2. Taxability of Basic Income Payments:
   A taxable Basic Income scheme ensures that payments are broadly targeted to those who need it most.
   • A taxable Basic Income is often paired with a simplified or reformed tax structure, giving comparable outcomes to a Negative Income Tax (NIT) system without the administration costs.
   • With a taxable Basic Income, high-income individuals receive the basic income but pay a significant portion or all of it back through taxes, potentially making them “net taxpayers”.
   • Money is effectively transferred from high-income to low-income earners, minimising the true “transfer cost” compared to the total payments.
3. Tax System Reform
   A new tax system, such as a simplified progressive tax with a uniform or flat-rate income tax for low to middle-income earners, and increased rates for high-income earners, is often proposed to accompany a Basic Income.
   • Other proposals include financing through a land tax or wealth tax, carbon tax or other specific taxes. 
4. Administrative Savings
   Replacing multiple complex, bureaucratic, means-tested welfare programs with a single, unconditional Basic Income streamlines the administrative process and significantly reduces the associated administrative costs.
   • This makes the government’s expenditure on welfare support more efficient.

Economic and Social Cost Offsets

The funding of a basic income may include other revenue streams.

• The economic and social benefits of a Basic Income can generate significant cost savings, making the program partially or fully self-financing. 

1. Multiplier and Velocity Effects:
   A Basic Income targeted at low-income individuals increases the aggregate Marginal Propensity to Consume (MPC) and the velocity of money and the multiplier effect.
   • Increased consumption, a higher velocity of money and increases in the multiplier effect all increase government tax revenue.
2. Improvements in Health and Well-being:
   Basic income trials have shown that financial security leads to improved physical and mental health, with recipients reporting less stress, anxiety, and depression.
   • These health improvements reduce the long-term burden on healthcare systems by decreasing hospital visits, chronic disease management, and emergency room usage, which can translate into government expenditure reductions.
3. Reduced Crime Rates:
   Poverty and financial stress are well-documented drivers of criminal activity.
   • By providing financial stability, a basic income reduces crime rates, reducing government expenditure on the justice system, including policing, courts, and incarceration.
   • The cost of a single person in a prison can be over NZ $125,000 per year, and a significant decrease in crime could lead to substantial government savings.

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In summary, a Basic Income using a suitable taxation system to target the Basic Income toward those who need it the most is funded by a combination of direct and indirect savings, including the simplification of the welfare system, lower administration costs, boosting economic activity leading to increased government revenue, improving well-being with lower health costs, and reduced crime and associated costs.

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• When people receive money, they may pass it on to others by purchasing goods and services, employing people or investing in new businesses.
• The Cantillon effect describes how changes to a nation’s money supply do not affect everyone equally.
• Instead, the initial recipients of new money benefit more than those who receive it later, leading to a redistribution of wealth and potentially impacting relative prices and resource allocation. 
• This occurs because those who initially receive the money first ensure that they receive the full benefit of the money before passing on a portion of the money. Because money takes time to circulate, the money reduces in value as it circulates due to inflation.

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The Cantillon Effect describes how newly created money doesn’t spread evenly through the economy. Instead, those who receive it first—typically banks, financial institutions, and asset holders—can buy goods and assets before prices rise. By the time the money reaches ordinary people, inflation has already kicked in, eroding their purchasing power.

This leads to:

• Distorted capital allocation: Money flows into sectors favored by early recipients, not necessarily where it’s most needed.
• Asset price inflation: Early recipients drive up prices of stocks, housing, etc.
• Widening inequality: Late recipients (wage earners, low-income households) lose out.

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A Basic Income counters the Cantillon effect by distributing money equally and simultaneously to everyone.

Here’s how a Basic Income does this:

• A Basic Income neutralises timing advantage: Everyone receives new money at the same time, reducing inflationary asymmetry.
• Boosts purchasing power broadly: Instead of concentrating demand in asset markets, it supports consumption across the economy.
• Reduces inequality: By giving all citizens a share of monetary expansion, it avoids enriching only the financial elite.
• Improves monetary transmission: Money reaches the real economy directly, not just through credit channels.

To counter the Cantillon Effect, new money should be distributed to all people as a Basic Income. Organisations like Encointer propose issuing new currency from the bottom up—as Basic Income—rather than through banks, explicitly aiming to reverse the Cantillon Effect.

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The Cantillon effect is named after the Irish-French economist Richard Cantillon, who first described it in his 1755 book, Essay on the Nature of Trade in General.

Richard Cantillon (c. 1680 – 1734) wrote his book, Essai sur la nature du commerce en général (Essay on the Nature of Trade in General), around 1730. The book circulated in manuscript form for many years before it was published posthumously in 1755.

The Cantillon effect highlights how changes in the money supply don’t affect all prices equally or simultaneously, with those closest to the new money supply benefiting first and most, while those further away experience delayed or less pronounced effects. 
Here’s a more detailed explanation:

Richard Cantillon’s work:
Cantillon was a pioneering economist who explored the relationship between money supply and prices in the early 18th century.
 
Key insight:
He recognized that when the money supply increases, the new money doesn’t enter the economy evenly. Some individuals or sectors receive the new money first (e.g., through government spending, bank loans), while others receive it later or not at all. 

Uneven price changes:
This uneven distribution of new money leads to uneven changes in prices. Those who receive the new money first can buy goods and services before prices have fully adjusted, potentially gaining an advantage. 

Impact on wealth distribution:
Over time, this can lead to a shift in wealth and purchasing power, as those who receive the new money early can accumulate more wealth while those who receive it later may experience a decrease in their real purchasing power due to rising prices. 

Modern relevance:
The Cantillon effect remains relevant today, particularly in discussions about monetary policy and its impact on different segments of society. 

• Instead, the initial recipients of new money benefit more than those who receive it later, leading to a redistribution of wealth and potentially impacting relative prices and resource allocation. 
• The Cantillon effect describes how changes to a nation’s money supply do not affect everyone equally.

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