Tax Cuts Or Spending Increases?

The right-wingers say that tax cuts stimulate the economy and government spending harms the economy. But why would tax cuts stimulate the economy more than spending increases? A $1 billion tax cut stimulates the economy only if the money is borrowed, by adding $1 billion that can be spent, which increases demand. But so does a $1 billion spending increase. In fact, a $1 billion spending increase would generally be used in ways that stimulate demand more than a tax cut. The spending would usually go to average people, who would immediately spend it on needed goods, so it would all be spent quickly. Meanwhile a tax cut would go to higher income people, who might spend it on a BMW, or more likely just save it.

If the money is borrowed it means that we all have to pay interest on that loan for many years, which is the opposite of stimulus. With massive borrowing the government also competes with businesses and others who want to borrow money, which further restrains the economy.

And what about a tax cut that is “paid for” by cutting spending? Cutting spending means laying off teachers, or not building a road that would employ hundreds of construction workers, or cutting back on unemployment payments, or cutting back on health care, which is a major employer. Think about the grocery store in the neighborhood of all the people who won’t be getting unemployment payment extensions next year.

So when you hear that tax cuts are good for jobs and the economy, and spend is bad for the economy, it might sound simple on the surface, but it’s not what it seems. The argument presupposes that taxes are collected and then the money just disappears. Don’t fall for it. In fact, it’s a useful life rule to just disregard anything a right-winger says as a trick with an ulterior motive of taking your money or lowering your wages. ;-0