The Velocity of Money: Why Tax Cuts Don’t Always Deliver
Disclaimer: The following is not investment advice. It is personal research used solely for my own informational and analytical purposes. All content, data, and assessments included may contain errors, omissions, or inaccuracies, and are subject to change without notice. This material should not be interpreted as a recommendation to buy, sell, or hold any security. Always perform your own due diligence or consult a qualified financial advisor before making any investment decisions.
Everyone loves a tax cut.
Voters cheer. Businesses grin. Politicians take a victory lap. But when the economic dust settles, some tax cuts drive growth—others quietly do nothing. And some spark chaos.
So what separates the winners from the flops?
One simple, powerful idea: the velocity of money.
What Is the Velocity of Money?
Velocity is how quickly money changes hands in an economy. It’s the difference between a vibrant high street and a ghost town.
When someone earns, spends, invests, and pays others, money circulates rapidly.
When money sits idle—parked in savings, offshore accounts, or overpriced assets—velocity drops.
High velocity means more activity per pound or dollar. Low velocity means economic sluggishness, even if there’s plenty of cash around.
The lesson? It’s not just how much money there is—it’s how fast it moves.
Who Gets the Tax Cut Matters
Tax cuts for lower-income households often boost velocity. People on tighter budgets tend to spend extra income immediately—on essentials, bills, transport. That money flows back into the economy quickly.
Tax cuts for high earners? Often the opposite. Wealthier individuals are more likely to save, invest in stocks, or park cash offshore. That slows circulation—especially if it goes into assets that don’t create jobs or demand.
Even corporate tax cuts can disappoint. While some businesses reinvest, others buy back shares or stash cash. The result? More value on paper, but little impact on the real economy.
The 2025 U.S. Tax Bill: Big, Bold—and Risky
In mid-2025, the U.S. passed a sweeping $4.5 trillion tax and spending package dubbed the “One Big Beautiful Bill.” Promoted as a boon to families and workers, the bill extended Trump-era tax cuts, added new deductions (for tips, overtime, student auto loans), and expanded child credits.
But the bill also paired those cuts with deep reductions in public services like Medicaid, food support, and clean energy subsidies. And it raised the debt ceiling by an eye-watering $5 trillion.
The velocity question is front and center: Will the new tax breaks mostly boost consumer spending—or end up enriching asset holders and inflating financial markets?
Some provisions—like overtime and tip deductions—may genuinely improve circulation. But the majority of gains, once again, lean toward higher-income households.
Liz Truss: A Velocity Cautionary Tale
In 2022, UK Prime Minister Liz Truss launched an aggressive, unfunded tax-cutting plan. The markets responded instantly.
Bond yields surged, the pound collapsed, and pension funds teetered on the edge. The government had to reverse course within weeks, and Truss resigned after just 44 days in office—the shortest tenure in UK history.
Her downfall wasn’t ideology—it was velocity. Investors feared the tax cuts wouldn’t spark real economic movement, only debt and inflation. That fear froze capital, destroyed confidence, and sent money running for the exits.
Public Spending vs. Private Hoarding
When governments cut taxes, they also cut revenue. Unless GDP grows fast enough to compensate, they must either:
Cut public spending
Borrow (sometimes heavily)
Public spending—on teachers, transport, healthcare—has high velocity. It supports jobs and services directly. Cut that, and the money often doesn’t move elsewhere fast enough to make up the difference.
Borrowing can work—if the tax cuts drive growth. But that depends entirely on whether the money flows through the economy… or stalls out.
Inflation, Assets, and the Great Disconnect
Tax cuts aimed at boosting demand can work—but if the economy’s supply side can’t keep up, inflation sets in.
Central banks then raise interest rates to fight inflation, which slows down investment and borrowing. So ironically, a policy designed to stimulate growth ends up doing the opposite.
Meanwhile, inflation often raises the price of assets like housing and stocks. That benefits the wealthy, further concentrating capital and—again—slowing velocity.
Natural Resources Are Finite. Money Isn't.
There’s another layer to this.
Governments can create money. But they can’t create resources: energy, materials, land, time, skilled labour. These are finite.
Throwing more money into the economy without addressing real-world limits causes bottlenecks and inflation—not real growth.
Velocity is the bridge between money and real-world value. It ensures that currency doesn’t just exist—it works.
Global Capital Doesn’t Wait Around
Today, capital moves across borders in milliseconds. Investors watch policy closely—and punish governments that appear reckless.
Tax cuts that widen deficits without credible growth plans can scare off investment, devalue currency, and drive up borrowing costs.
The Truss crisis was a warning. The 2025 U.S. bill might be another, depending on what happens next.
The Real Takeaway: It’s Not About How Much, But How Fast
Politicians love to argue about how much tax people should pay. But the more important question is: what do they do with the money once they have it?
If tax cuts get people spending, investing in their communities, hiring staff, or buying goods and services—that’s velocity. That’s growth.
If they end up as dividends, debt repayments, or deposits in Cayman accounts—that’s stagnation.
Velocity is what turns policy into prosperity. Without it, even the biggest tax cut becomes just another headline.
Final Thought
You can’t print more oil, time, or talent. But you can make money move. That’s where real economic power lives—not in how much we have, but in how well we use it.
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