Benefit of Tax Cuts in General

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Dennis
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Benefit of Tax Cuts in General

Post by Dennis »

I am aware of the need for business taxes to be competitive and I understand how some specific and targeted tax cuts may be used to direct attention in a specific industry but beyond this, do tax cuts really affect the economy of a country in any way?

This seems to be one of the "stimulus" methods widely called for in this recession.

I am also aware of the philosophical argument that individuals can spend their money better than the government but a debate on this is not my intention.

I would like someone, anyone, to describe specifically just how tax cuts in general affect the economy one iota!
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Re: Benefit of Tax Cuts in General

Post by marty123 »

In a nutshell, if you give more money to people (by ways of returning tax dollars), they'll spend it (or invest it), and help support the economy.

That doesn't work so well in an environment where people remain worried, and instead use the money to pay down debt, which is what the $150B US stimulus appears to have done back in January.

The other concern to be had is that if spending works, it may be spent into another economy. If I use my $2,000 tax cut to spend time on a Mexico beach, or if you use yours to buy electronics made in China, we're not creating Canadian jobs and the money may help shore up other economies. That's why infrastructure investments are often pushed as a better alternative: they create local jobs, they typically use local materials, and they improve society (by adding or improving something).
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Post by Dennis »

In a nutshell, if you give more money to people (by ways of returning tax dollars), they'll spend it (or invest it), and help support the economy.
marty.....I've heard that theory many times but nobody has showed me persuasively that the individual can put the money into the economy any better than the government. In fact, the government can target spending to ensure that it is not spent on BMWs and French wine.

The way I see it, a buck into the economy is a buck into the economy whether is the government or the individual doing the "spending".
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Post by marty123 »

That's what I said in my above post. Government spending buys us something, while tax cuts buys you something. It's all about what gets bought.

Now if the government buys a bridge that will improve a community and would likely have needed to be built in 2015: that's IMO better than a tax cut. If the government hands out the money to failing businesses: it may or may not be better than a tax cut.
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Re: Benefit of Tax Cuts in General

Post by millergd »

Dennis wrote:I would like someone, anyone, to describe specifically just how tax cuts in general affect the economy one iota!
It's shaping the economic curve. Most tax cuts are not in fact government surplus reductions but rather borrowing against the future. Hence, it is introducing future money into today's economy, in the hopes that higher taxes and/or future economic growth will be able to compensate for the accrued debt when times are better.

Tax cuts are also often shaped to be small enough that they get people to spend. If you're given $50, you'll spend it. If you're given $500, you'll probably pay down debt with it. That's why the checks are always so small.

That's the textbook answer. In reality national debt keeps piling on with tax cuts, and when times get bad, there are even more tax cuts, further adding to debt. Then, depending on how the debt is funded, inflation becomes a possibility, and interest rates go up.

For more information, read about Monetarism and Keynesianism at Wikipedia.

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Post by blonde »

TAX is a dewealthitizer. (Natural Law).

Most 90%ers will WASTE their tax rebate cheques. (Natural Law)

Govt is a Mega Worst Employer... Govt System has 50-100% PURE-WASTE built-into 'eir System. (Natural Law)

Politics is a Business.
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Re: Benefit of Tax Cuts in General

Post by ghariton »

marty123 wrote:That doesn't work so well in an environment where people remain worried, and instead use the money to pay down debt, which is what the $150B US stimulus appears to have done back in January.
That is the standard argument. But we've also been hearing that consumers are much too indebted, and won't increase their spending until their debt levels go down. If this is true, it may be a positive that consumers use tax reductions to pay down debt -- it will get them spending all that quicker.

And of course money saved doesn't just disappear. Most of it becomes available for investment, which in turn leads to more spending by the business sector.

Most macroeconomic models deal only with aggregate demand, and don't really look too closely at the structure of the aggregate demand (i.e. consumption versus investment verdus government spending). To a first approximation, that seems right. But over the longer term surely the composition of demand has a very significant impact. For example, favouring consumption over investment creates intergenerational transfers -- we become somewhat better off, and our children somewhat worse off.

To answer Dennis' specific question: The impact of tax cuts depends heavily on which taxes are cut, and how those cuts are financed. So for example corporate tax cuts increase investment in two ways. First, companies have more money left to invest. Second, it becomes more attractive for investors to inject additional funds, since the after-tax return is now higher, all other things being equal. On the other hand, companies with extra money have been known to piss it away. As well, investment takes time (unless it is simply throwing money away).

Personal income tax cuts would increase current consumption more. There would also be an impact on investment -- increased demand by consumers requires inbcreased capacity, workers, etc -- but with a time lag. More importantly, to the degree the increased dermand is met by working existing plant, equipment and workers harder, there will not be as much benefit for future generations.

Increased government spending is a substitute for investment and consumption when calculating aggregate demand. But government typically sends on different objects. Infrastructure is a popular government object. Improving infrastructure can increase productivity and make our lives easier in direct ways. But infrastructure is typically only one input to the production process. Its level needs to be balanced against increases elsewhere. So, beyond a certain level, further spending on infrastructure may not be as helpful as spending on, say, information technologies. And anyuway, unless the infrastructure projects are already planned, they may take too much time to be helpful in combatting a recession.

If aggregate demand is to be increased by either more business sector investment or more government spending, a big concern is to ensure that the results lead to greater productivity downstream, and that the money not be pissed away on wasteful projects. This should always be a concern when spending money now, with the payoff in the future, of course. But it seems to me that it is an especially acute problem when there is intense pressure to "do something", as there is currently. (It's harder to get current consumption "wrong").

So for example the bailout of the "big three" automotive manufacturers (I bring them into this thread only for illustrative purposes :!: ). Giving them money will indeed increase aggregate demand. But then what? Will it increase current consumption? (unlikely if nobody wants the additional cars they will make). Will it increase business investment in a productive way? (show us the business case). Will it improve infrastructure, or perhaps lead to more R & D or better education? (unlikely ). Indeed, if bailouts become an excuse to delay restructuring the industry, the impact on productivity in the future could well be negative, and we will really have sacrificed future generrations to favour those in the work force now.

Thus endeth the sermon. Sorry for running on so. :wink:

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Re: Benefit of Tax Cuts in General

Post by marty123 »

ghariton wrote:
marty123 wrote:That doesn't work so well in an environment where people remain worried, and instead use the money to pay down debt, which is what the $150B US stimulus appears to have done back in January.
That is the standard argument. But we've also been hearing that consumers are much too indebted, and won't increase their spending until their debt levels go down. If this is true, it may be a positive that consumers use tax reductions to pay down debt -- it will get them spending all that quicker.
It makes sense, but I'd guess that when you say "spending all that quicker", it could mean months out (when the debt level is sufficiently down for the consumer to regain confidence in his/her financial means).

What I also read between the lines in your posting is that each measure has a different timing. What I'd see as the least productive government investments (i.e. tax cut to boost spending or investment in a failing business like GM/Chrysler) may be what works best in the short term, while what appears to be the most efficient for the society in the long term (i.e. investing in infrastructure, in good businesses that will lead tomorrow's economy or in corporate tax cuts) are what takes the longest to show results. Is that typically right?
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Re: Benefit of Tax Cuts in General

Post by DenisD »

ghariton wrote:
marty123 wrote:That doesn't work so well in an environment where people remain worried, and instead use the money to pay down debt, which is what the $150B US stimulus appears to have done back in January.
That is the standard argument. But we've also been hearing that consumers are much too indebted, and won't increase their spending until their debt levels go down. If this is true, it may be a positive that consumers use tax reductions to pay down debt -- it will get them spending all that quicker.
Maybe there's another possibility. Jane Consumer hears she's going to get this nifty government rebate in the mail in a few months. So, she heads down to the mall, spends the rebate and puts it on her credit card. A few months later, when the money arrives, she pays down her credit card debt.
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Re: Benefit of Tax Cuts in General

Post by izzy »

DenisD wrote:
ghariton wrote:
marty123 wrote:That doesn't work so well in an environment where people remain worried, and instead use the money to pay down debt, which is what the $150B US stimulus appears to have done back in January.
That is the standard argument. But we've also been hearing that consumers are much too indebted, and won't increase their spending until their debt levels go down. If this is true, it may be a positive that consumers use tax reductions to pay down debt -- it will get them spending all that quicker.
Maybe there's another possibility. Jane Consumer hears she's going to get this nifty government rebate in the mail in a few months. So, she heads down to the mall, spends the rebate and puts it on her credit card. A few months later, when the money arrives, she pays down her credit card debt.

Isn't that the behaviour that got us into this mess in the first place? :shock:
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Post by saylavbda »

Dennis wrote:I've heard that theory many times but nobody has showed me persuasively that the individual can put the money into the economy any better than the government. In fact, the government can target spending to ensure that it is not spent on BMWs and French wine.
A dollar spent is a dollar spent, both end up in the economy, the question should be what do we get for that dollar spent. if I spend the dollar, I know what i'm getting. With the gov't it's an unknown, and I don't trust the gov't to spend it with due care. Just look at the reports of gov't waste and overspending.

I would rather limit the funds gov't has and leave it with the people who earned it. If an infrastructure project is needed, then it will get built. I sense that if gov't at the different levels know that they'll get extra funds as a form of stimulus, all that will happen is projects of low priority/use will be undertaken that otherwise would have been passed on as not needed. At the end, we'll have the money in the economy and some bridge or building that is near useless. Just look up the bridge to nowhere in Japan.
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Post by blonde »

FACT: politics is a BUSINESS...billions of dollars involved...billions of dollars for the taking...cycle time is paramount...

politicians have no responsibility...no accountability...easy come...easy go. Most 90%er taxpayers LUV it.

OTOH...being in the 'Loop' does have its merit...infrastructure projects provide the perception that 'something is being done'. A Smart Entrepreneur will play the 'Game' by the 'Rules'...needless to say, any flaw (as per design) in the project works out to cost-plus on the pay cheque, and that is a darn good thing. As long as the taxpayer is willing to support and reinforce these practices...why not Milk the System for all its worth...It is ALL about MONEY...MEGA-MONEY. The Winners hold the Money-Pot.

Whatever process works for either a politician or immigrants is A-OK for a Smart Entrepreneur. There ain't no money to be made by either baulking or blocking the SYSTEM. Cooperation is good. Confrontation is BAD.

as an aside...make hay while the sun shines.

er, ah,...the govt hand has Mega-Money reserves available in the RRSP accts.

stay tuned. It's coming.
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Post by 83_gemini »

Also taxation creates a deadweight loss, so to tax cuts (depending on the rates etc) may increase efficiency, depending on how government is "doing" as it were.
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Post by worthy »

Speaking in Buffalo, President Bubba once told a group of worshippers, "we could give you a tax cut. But you might not spend it in the right way!"

Never has Democratic dogma been so clearly spelled out. Tax cuts are not on the agenda. More likely, windfall profits taxes and tax increases for the wealthy, as per the Democratic campaign platform and promises.

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Obama: Don't worry! Spend! Be Happy!
“We shouldn’t worry about the deficit next year or even the year after."#

Instead of tax cuts, which foolish subjects might not spend in the "right" way, the enlightened state will beg, borrow and steal to prop up failing lenders, carmakers and whatever other industry can make a case. Simultaneously, it will spread a few more trillion around in infrastructure and make work projects. Recent dream lists include everything from petting zoos to current spending deficits in hundreds of broke cities across the Imperium.

So far, the tab is more than $8 trillion, with another estimated $800 million-$1.5 trillion to come when the Chosen One ascends the throne.

True to form, ex-President Bubba says the government must spend its way out of recession. "There's no alternative."

The economic argument is, as one enthusiastic statist explains, that "government spending is more tax-efficient, relatively far more suffused with moral imperatives and ethical choices, and more often than not more financially productive than private spending, whether indirectly via charities or directly by government agencies. ... Economies prosper by transferring spending from the rich (who might otherwise hoard it unproductively) to the poor."

So there you go, expecting tax cuts from that bunch to "stimulate" the economy.

As Lord Keynes observed in the German edition to his Bible of "government spending, his is a system more suited to a totalitarian state than a messy laissez faire system.

A managed economy is so much more orderly than the chaos of a free market.
Last edited by worthy on 22 Dec 2008 12:44, edited 3 times in total.
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Post by parvus »

worthy wrote:The economic argument is, as one enthusiastic statist explains, that "government spending is more tax-efficient, relatively far more suffused with moral imperatives and ethical choices, and more often than not more financially productive than private spending, whether indirectly via charities or directly by government agencies. ... Economies prosper by transferring spending from the rich (who might otherwise hoard it unproductively) to the poor."
Surely that's worthy of a url. :wink:
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Post by ghariton »

parvus wrote:[Surely that's worthy of a url. :wink:
From Robert McDowell (first comment on Harford's post).

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Post by Dennis »

http://www.cbc.ca/money/story/2009/01/0 ... taxes.html

Flaherty hints at tax cuts in upcoming budget
Last Updated: Friday, January 2, 2009 | 6:06 PM ET


This was my fear when I started the thread. So far, nobody has showed me any convincing evidence that general tax cuts stimulate the economy better than government spending.

I must conclude that Flim Flam Flaherty is going to disguise an ideological tax cut as a stimulative one (that will only add to our national debt of course).

Oh well, the "starve the beast" fans will be happy :cry: :cry:
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Post by ockham »

In a recent article in the New York Review of Books, Paul Krugman argues against tax cuts, as a response to the current crisis, on the grounds that there is no assurance that the consumer will spend the tax savings at a time when what is needed is spending, and there is no assurance that the consumer will spend, if he spends, on anything productive (e.g. infrastructure). Hence the need for gov't spending.

In an interview with Steven Jarislowsky I heard just before Christmas, he argued against tax cuts on the grounds that at times of uncertainty both consumers and corporations will use tax cuts to build their own balance sheets, not spend. Hence what is needed is massive gov't spending. His main concern was that the spending level would not be large enough to avoid the true hazard, which he saw as deflation.

In addition, I have the following rule of thumb which has served reasonably well: if Jim Flaherty is for it, it (whatever it is) is almost certainly wrong.
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Post by worthy »

A recent paper by macroeconomists Christina and David Romer entitled DO TAX CUTS STARVE THE BEAST? THE EFFECT OF TAX CHANGES ON GOVERNMENT SPENDING says (scroll to working papers):

"The hypothesis that decreases in taxes reduce future government spending is often cited as a reason for cutting taxes. However, because taxes change for many reasons, examinations of the relationship between overall measures of taxation and subsequent spending are plagued by problems of reverse causation and omitted variable bias. To derive more reliable estimates, this paper examines the behavior of government expenditures following legislated tax changes that narrative sources suggest are largely uncorrelated with other factors affecting spending. The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, the point estimates suggest that tax cuts may increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases. Examination of four episodes of major tax cuts reinforces these conclusions." (emphasis added)

Ms. Romer is the incoming chair of the Council of Economic Advisors.

On the other hand, some commentators are seizing on a conclusion in the Romers' most recent paper that tax increases are contraindicated in a recession as reason to support tax cuts.
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Post by millergd »

Dennis wrote:Flaherty hints at tax cuts in upcoming budget
Last Updated: Friday, January 2, 2009 | 6:06 PM ET


This was my fear when I started the thread. So far, nobody has showed me any convincing evidence that general tax cuts stimulate the economy better than government spending.
It does stimulate vote-garnering among the masses. Remember, it's the perception that it stimulates the economy more so than the actual stimulation of the economy itself. Optics, optics...

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Post by Mike Schimek »

IMO tax cuts are good when accompanied by reduced government spending or stable government spending while revenues increased.
The way I see it, a buck into the economy is a buck into the economy whether is the government or the individual doing the "spending".
The theory behind government is great, the problem is it doesn't work; any dollar you keep and spend, you get a dollar of "satisfaction" back. Any dollar you give to the government to spend and the government spends on everyone, everyone probably collectively receives only 50cents of "satisfaction" back,

because IMO the government is large, inefficient, etc. etc. for numerous reasons.

That's where the problem is. The ideal situation IMO is to have a government that is as small as possible and "least involved" as reasonably possible. The more the government does for us, the more it costs us because it is not done efficiently.

I am not saying "no government", I'm saying "a whole lot less government" because the larger the government is and interferes, the more inefficient the economy is and the lesser our standard of life and freedom becomes.


If you want something to think about, take it to the extreme limit, and suppose the government took 100% of your labor in the form of tax revenue, and redistributed it to everyone. Smoke that in your pipe for a while...
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Post by Mike Schimek »

A good comparison too of big vs small government size and involvement, is to look at various economies around the world, and compare their 10 year track records of economic growth vs size of government.

You can look at countries like Argentina, with a government that is trying to control the economy in many ways, Venezuela, Cuba, etc. They would be on the extreme control side. Or perhaps the former U.S.S.R., with emphasis on the former part.

Then we have Georgia, which I deeply admired as a breath of fresh air when I heard the president say "the government wants to help the economy, we're going to help by getting out of and staying out of your way"...

I thought to myself, wow. I wish I lived in that type of country, not one where so many people think they need to have the government hold their woo woo every time they have to go pee pee.

Georgia;
Despite the severe damage the economy suffered due to civil strife in the 1990s, Georgia, with the help of the IMF and World Bank, has made substantial economic gains since 2000, achieving robust GDP growth and curtailing inflation.

GDP growth, spurred by gains in the industrial and service sectors, remained in the 9-12% range in 2005-07. In 2006, the World Bank named Georgia the top reformer in the world.[3]
Economic recovery had been hampered by the separatist disputes in Abkhazia and South Ossetia, resistance to reform on the part of some corrupt and reactionary factions, and Asian financial crisis. Under President Shevardnadze's leadership, the government had nonetheless made some progress on basic market reforms: all prices and most trade have been liberalized, a stable national currency (the lari) was introduced, and massive government downsizing took place.
and massive government downsizing took place.

The problem is there, for all to see IMO.

:shock:
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Post by Shakespeare »

My personal suspicion is that a lot of the Ralphbucks issued in Alberta went to supporting BC crop-growers, at least amongst the younger generation. :wink:

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Post by c emptor »

If it's Ralph Klein or Flaherty ,conservative politicians ,cutting taxes or giving rebates it's deplorable. But if it's Obama that another story. :roll:


President-elect Barack Obama plans to include about $300 billion in tax cuts for workers and businesses in his economic recovery program, advisers said Sunday, as his team seeks to win over Congressional skeptics worried that he was too focused on government spending.

The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.
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Post by saylavbda »

Dennis wrote: This was my fear when I started the thread. So far, nobody has showed me any convincing evidence that general tax cuts stimulate the economy better than government spending.
The flip side is also true, that nobody has shown that government spending is any better, so if neither is superior to the other, then lets pick the one that give the most non-monetary benefit to the taxpayer.

Since with a tax cut all taxpayers get to benefit, while with government spending the amount of benefit and who gets it is questionable.
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