Categorized | Tax

More Tax Cuts or More Spending for Economic Stimuli?

The following article by Pat Choate appeared in the Huffington Post on September 7, 2010.  Mr. Choate is an economist and author, and is on CPA’s Advisory Board.  Click here to see the article on the Huffington Post site.

More than 25 million American workers want a job, but the economy is not providing them one. The President’s proposed solution is to provide more than $50 billion of additional infrastructure investment and more than $100 billion in tax breaks for businesses in the hope that the benefits will trickle down to the jobless.

In both policy choices, the federal government would have to borrow the money and increase the national debt. If Congress is to approve additional stimulus spending, the key question is which will produce the most stimuli per federal dollar - more tax cuts or more spending?

Economist Mark Zandi of Moody’s has analyzed the fiscal stimulus returns per federal dollar spent on permanent tax cuts versus spending increases. He reports that,

•    Making the Bush income tax cuts permanent would provide only 31 cents of benefits per federal dollar of reduced taxes;
•    Making the dividend and capital gains tax cuts permanent would return 38 cents per dollar cut; and
•    Making a cut in the corporate tax rate would create 30 cents of stimulus per every dollar of cuts.

To get back only 30-40 cents of stimulus per federal dollar is fiscal folly. Washington could get triple the benefit by placing federal workers on street corners and have them pass out hundred dollar bills.

Zandi also reports on how much stimuli would be created by more spending. Specifically,

•    Extending and increasing unemployment insurance benefits provides $1.63 of benefits for every $1 spent.
•    Temporary increases in food stamp spending produces $1.73 of stimulus per $1 spent.
•    General aid to help deficit-racked state governments pay for teachers, firemen, police and other public sector workers gives back $1.38 per federal dollar, and
•    Increased infrastructure spending induces $1.59 of stimulus per $1 invested.

To emphasize my earlier point, either more tax cuts or more spending would have to be paid for by increased federal borrowing.

To make the point really simple: tax cuts of $100 billion would reduce federal tax revenues by $100 billion and the funding gap would have to be paid for by the federal government borrowing $100 billion. Likewise, a spending increase of $50 billion would require the federal government to pay for it by borrowing $50 billion.

With $100 billion of tax cuts, the U.S. would get about $33 billion of stimulus back. With $50 billion of additional spending, the nation would get about $82 billion of stimulus. The best choice seems obvious once the arithmetic is calculated.

Ultimately, however, the choice is not about economics, but politics and ideology. The beneficiaries of corporate tax cuts have deep pockets from which they finance the political campaigns of those elected officials who do their bidding, lobbyists and think tanks that echo their “lower tax” propaganda.

The beneficiaries of more spending have far less political influence and are handicapped by a popular notion that spending is irresponsible and tax cuts are not. The spending advocates must rely on the President and Congress to calculate the arithmetic and then do what is best for the nation.

If we are to get the biggest bang for the buck, our leaders should strongly favor more spending over more tax cuts. Moreover, they should act in a timely manner because until we get this economy moving again 25 million Americans will remain jobless.


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