Reply #15: Lost purchasing power

[Linette]

A corollary of this is that Kroger's assertion that "even steeply progressive income tax rates---right up to 99% on the highest incomes---would impose no sacrifice whatsoever on wealthy Americans in terms of lost purchasing power" is wrong.

The way it was explained to me is that first of all a steeply progressive income tax should be phased in gradually so that rich people wouldn't panic and markets would have time to adjust slowly. Then, because rich people would have less money to spend, some luxury items wouldn't sell, and so the luxury sellers would would cut their prices to sell what they have and they would also have to cut back on their orders to suppliers, forcing them to lower their prices. Profit margins would get squeezed and cost-cutting would occur until the prices of suppliers throughout the supply chain had lowered their prices enough for the rich to afford what they would have bought before, when both prices and incomes were higher. The end result is the reverse of inflation. The same quantity of goods gets sold at lower prices.

So if people are still buying everything that they would have been able to afford before, only at lower prices, where is the lost purchasing power?