Tuesday, February 10, 2009

Do Tax Cuts Create Jobs?

Do Tax Cuts for the Wealthy Stimulate Employment? - New York Times
Had the dollars required to finance the president's tax cuts been used in other ways, they would have made a real difference. Larger tax cuts for middle- and low-income families, for example, would have stimulated immediate new spending because the savings rates for most of these families are low. And their additional spending would have been largely for products made by domestic businesses - which would have led, in turn, to increased employment.

Tax cuts, when used properly, have stimulated the economy. Many credit President George W. Bush's tax cuts for moving the economy out of recession. Similarly, in 1964, Congress enacted an 18% cut in personal taxes to spur growth. The legislation was designed to encourage consumer spending - many believe that it succeeded admirably as consumers delivered a textbook reaction.

Two salient arguments found here.  I think that the idea of the two in aggregate are this: Tax cuts work, but only when done in a certain way. 

  • Tax cuts for businesses work, because more money is available for
    capital expenditures and salary expense.  Some of this will, no doubt,
    go to stockholders, but that's not all bad either.  We've got to have
    someone with the wherewithal to put up venture capital ;-).
  • Tax cuts for consumers work. Your average consumer saves very little
    and is very happy to spend their money on large screen TV's, Nintendo
    Wii's, clothes, books, etc... This is revenue for companies, which in
    turn can hire more folks as stated above. 
  • Tax cuts for the very wealthy MAY lead to Madonna (who earned more than
    my entire business unit in 2007) hiring another chauffer, but...


Monte Asbury said...

I'd add a thought: tax cuts for businesses are effective when capital is in short supply. For some years, US businesses have put capital needs pretty low on their lists of priorities for growth. As a result, the last eight years saw the 400 richest Americans' incomes double while the economy headed for disaster.
That which they ID as their top need, by contrast, is finding a properly educated workforce. Which suggests education spending might be more stimulative.

Monte Asbury said...

You might be interested in the non-partisan Congressional Research Service's report to Senators and Representatives about stimulus options: Economic Stimulus: Issues and Policies and this intriguing piece featuring the centrist industry analysis group Moody's Economy.com analyst Mark Zandi: Moody's study suggests extending unemployment benefits, increasing food stamps fastest ways to stimulate economy.

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