I'm going to take the side of tax cuts stimulate the economy. Like we learned in class and in the recent experiment taxes only hurt buyers and sellers, despite who pays the taxes. If the buyer pays the taxes then the price they are willing to pay will be lower because they have to compensate for the taxes they are going to have to pay and vic versa with the sellers. Also, I can't think of a better way to stimulate a failing economy than to let the people in the economy keep more of their money to either save, invest, or spend. Basically, if you pay taxes you will benefit from a tax cut, in the form of a larger disposable income.
Tuesday, February 17, 2009
Tax Cuts Stimulate?
I'm going to start off this entry with a question, mainly because I want to know what everyone thinks about the idea of a tax cut used to stimulate the economy. The way I look at it there are two different thoughts on this idea. One way being that a tax cuts boost our economy by allowing people to keep more money therefore spend more money. The other way being that tax cuts only help the rich because by reducing taxes you reduce the amount of money the government receives to provide services, therefore hurting the poor.
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Just a couple of comments:
ReplyDeleteAs far as stimulating the economy goes, I don't think that the idea behind tax cuts is to allow people to save money for later (be it by putting them on their bank account or stashing them at home). On the contrary, I think that like any urgent intervention measure it is mostly used to keep money moving and encourage people to increase their immediate spending. The two other things you've mentioned (i.e. investing or spending) would achieve just that.
One of the signs of a healthy economy is that people are not holding back on spending a large portion of their incomes to purchase goods and services and aren't afraid to invest at least a portion of the rest. These transactions also have direct impact on the Gross Domestic Product which is the most accurate way to determine a country's economic change within a space of a year.
By the way, when governments pass tax legislature they are usually counting on the so called Spending multiplier or multiplier effect, which basically means that for any amount that the government spends they are going to get a an increased effect due to the fact that once that money is spent it will encourage the people who get it to spend it again, etc. It's a somewhat controversial idea and I believe that there is actually another force that opposes it so all tax related decisions are very complicated.
Since I do believe that decreased spending is the single most important factor that's costing people jobs and decreasing the overall sense of confidence (which, in turn, forces people to spend even less), I would agree that in general tax cuts (or stimulus packages) are a good way to try to break this vicious cycle by placing extra money into people's pockets. This is assuming, of course, that the Government has this money to give out in the first place and isn't doing it at the cost of some other, perhaps more important social or economic program.
Even the effects of these measures are mostly psychological; I still think they are worth doing. I’m not implying that it’s just a placebo effect but it does help when people get an impression that the officials they elected are doing something to solve economic problems instead of bickering with each other or being generally passive. This, too, assumes a certain amount of thinking behind the tax cuts as there's a risk that they backfire and end up increasing the rate of inflation.
In regards to the tax cuts mostly benefiting the rich, a lot depends on the actual tax cut in question, as depending on the terms they may actually focus solely on benefiting the middle class and the poor... I know, like that's ever actually going to happen.
That said, there are some normally "rich" companies that have a large number of local employees, are currently struggling, and could actually use the extra $$$ for good. The trouble is finding out what these companies are and rewarding them while ignoring companies that cut costs by outsourcing their work to other countries. Or worse.
By the way, could you please clarify what you meant by "taxes only hurt buyers and sellers, despite who pays the taxes." I'm a little confused by your use of the word "only" in that sentence.
Thanks!
I think tax cuts, especially from what we have seen has become a flawed ideology that politicians throw around for the sake of collecting votes.
ReplyDeletePretty much politicians as well as some economics hope for what is called a trickle down effect. This principle of cutting tax's on corporations so they can hire more people or to expand the company. However statistically this does not happen and in some cases companies actually eliminate positions. From there it seems that a snowball effect begins. We have a recently unemployed person, lets call him Joe, who is now collecting welfare from the government. A drain on the economy.
Joe gets sick and cannot afford health care anymore so relies on medicare. Again draining money from the economy..you get the gist.
I'd like to think that when people are getting laid off from their jobs there should be a plan to create more jobs. Cutting taxes now however, especially with a $1.6++trillion deficit is not the answer.