Refresher (Taxes, Spending and Stimulus)
In a deficit spending environment, government spending is stimulative. For real.
In a deficit spending environment, tax cuts are stimulative. For real.
The question is not whether, but rather "how much?"
In todays world we should continue borrowing money like crazy and we should distribute that money to where it will be spent, and we should return upper income tax rates to at least where they were under Clinton... as long as we divert that gained revenue to spending. That is what we should do.
That is the right answer.
It is, however, a right answer based on the practical effects of policy, not on a categorical distinction between tax cuts and spending. Those two things are economic variables, not moral totems. (The Republican error is not in thinking tax cuts are potentially stimulative. Their error is thinking that they are optimally stimulative and in thinking they are an intrinsic moral good.)
There is nothing religious about spending or tax cuts or tax hikes or austerity... no intrinsic "good" or "bad"... their effects are practical and calculable.
Example 1: Reduce taxes on the rich by $1 trillion. Reduce government spending by $1 trillion to pay for it. In this case there is no stimulus from the government borrowing money, because it is paid for. And a dollar of government spending makes a larger contribution to useful demand than the same dollar sitting in Scrooge McDuck's money bin. So the net effect is contractionary. Dollars are shifted from being spent to being hoarded. If, however, the rich were going to do something with that trillion dollars that was more stimulative than what the government was doing with it then the net effect would be stimulative. For instance, if the government diverted $1 trillion of nuclear missile production to a rich guy who was going to use it to build toll mass transit in LA it could, conceivably, be net stimulative. It is, however, very, very, very, very, very unlikely.
The Republican error is the assumption that what rich people do is, on average, more economically productive than whatever the government does. That is false. What rich people mostly do is move numbers in banking and trading computers around trying to make the numbers bigger.
Example 2: The economy collapses and the only political options are a) do nothing, or b) cut taxes on the rich by $1 trillion and borrow the money to cover the lost revenue. In this case, the tax cut is more stimulative that doing nothing. It is less stimulative than building a hydroelectric dam. It is less stimulative than handing out $1 trillion to passersby on the street. It is less stimulative than the same tax cut directed to the upper middle class, and that itself would be less stimulative than a tax cut for the lower middle class. And so on. But it is net stimulative.
Example 3: Cut everyone's taxes 50%and borrow the money to pay for it. This would be immensely stimulative. The same overall size tax cut excluding the very wealthy and cutting everyone else's taxes by 75% would be even more stimulative. And so on.
Example 4: Raise taxes on the wealthy by $1 trillion to pay down the deficit. This would be very contractionary. The economy would slow dramatically. Sparing the rich and raising taxes on the middle class by $1 trillion to pay down the deficit would be even more contractionary.
Example 5: Eliminate some oil tax breaks and send out the revenue gained in tax rebate checks to everyone who paid taxes. This would be revenue neutral but net stimulative. If, however, in the unlikely event that everyone just put the rebate checks in the bank and the oil company canceled a pipeline or something then the effect would be net contractionary.
In each case the question is how much net money there is being used in the economy used to generate demand for goods and services. Spending, taxes and borrowing are variables. Shifting them around yields different results.
The average tax cut is less stimulative than the average spending increase. But it is easy to devise hypothetical tax cuts that are more stimulative than hypothetical spending increases.
Tax cuts are inferior stimulus for practical reasons, but tax cuts are not conceptually non-stimulative.
