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Wednesday, July 15, 2009

Trickle-Down Tax Cuts Faster Than Direct Capital Injection?

In this article, Dean Baker explains the difference between the two different types of economic stimulus – spending versus tax cuts.
Excerpt: (July 13, 2009)
One dollar of additional spending is generally estimated to have a multiplier effect in the neighborhood of 1.5, meaning that for every dollar we spend on a government project, we increase GDP by $1.50 as the people we hire go out and spend their paychecks, creating new demand.

The multiplier effect on tax cuts is generally estimated as being in the neighborhood of 0.9, or less. This means that $1 of tax cuts will end up increasing GDP by about 90 cents. Unlike spending on things like road construction or health care, a tax cut does not directly generate demand.
In this video, Rep. Paul Ryan and Greg Mankiw (former WH counsel) generally agree that the multiplier for spending is about 1.5, but predictably hold tax cuts at a much higher multiplier benefit of 3.0, although Mankiw admits the evidence on the multipliers is inconsistent and inconclusive.

Baker concludes that the current spending stimulus is not large enough.
Excerpt: (July 13, 2009)
In short, we badly need another very big dose of stimulus. Unfortunately, the politicians and pundits in Washington are either too ignorant, dishonest, or scared to talk about the $2 plus trillion stimulus that this economy needs.
Obviously, Ryan doesn't see things the same way.
Video Excerpt: (Jan. 26, 2009)
Ryan: We are worried that all we are going to do here is this huge spending package that won't really spend out very fast. The spending in and of itself won't create jobs. The tax cuts aren't the right kind of tax cuts to actually create jobs. This is the wrong fiscal response.
Apparently, Ryan has a problem with the speed of the spending stimulus. It's not fast enough. So his plan to create economic stimulus that would “spend out” sufficiently fast enough to have an impact involves tax cuts and credits to the wealthiest (again) that will lift their expectations for the future so greatly, that at some point sooner or later they will invest the tax savings eventually into new plants, equipment, etc., while demand remains unstimulated, flat or in decline. Ryan has referred to his tax cuts as "fast-acting."

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