saylavbda wrote:Question is with both a tax cut or an increase in spending the goal is for the govt to get more funds into the economy. Since it seems unclear that one method is superior to the other in getting the money into the economy, I would argue that at least with tax cuts all (or more) taxpayers will benefit by the amount of the cuts have for that person. With govt spending the benefit to the taxpayer is unknown and the ability of govt to proper allocate funds and manage projects is already well known.
Hence my vote for broadbased tax cuts over gov't guided spending (or misspending as the case may be).
Ah, but I think you're making two simplifying assumptions. The first is that the vast majority of taxpayers would see much of a tax reduction ($500 on labour income sounds about right.) From StatsCan, 90% of Canadians make less $72,000 and 50% less than $29,000. After tax, the figures are $60,000 and $30,000 (taking transfers into account). (This is from a 2007 study
using 2004 figures; the figures are approximate, I scanned them off the charts, but they're in the same ballpark as other things I have cited elsewhere.)
The second is that such taxpayers would not misspend — I'm not thinking of their tax refunds, or even their incomes: rather that most households are leveraged (even purportedly wealthy ones) and hence a major source of systemic instability, waiting, perhaps, for a government to bail them out.
Oh yes, sources. StatsCan
indicates the average debt-to-income ratio in 2005 was 110%, compared to 75% in 1990 and 50% in 1985. Credit cards account for 33% of debt, up from 26% in 1993.
Three points readily emerge: most Canadians make far less than people think they do, and consequently pay far less tax than the widely disseminated (and highly dismissable) Fraser Institute Tax Freedom day; most Canadians have eye-popping debt loads compared to their income, a trend hastened in the late 1990s and 2000s: a $500 refund is not going to bleed much out of average debts of $28,000; three ... there must be some blondism here, something along the lines of 90%ers are fooked.
Beyond that, when it comes to public spending, the Public Accounts
indicate that, of $232 billion in expenditures in fiscal 2007-2008, half went to transfers to people and provinces ($131 billion) and payment of public debt ($33 billion). That leaves $68 billion in programme spending — more than what the government of Québec
spends, but less than what Ontario
does. Strip out National Defence ($17.3 billion), Public Safety ($7.9 billion), CRA ($7.4 billion) and Crown Corporations ($7.3 billion, but they brought in $6.5 billion in revenue), and we're down to $28 billion — about what Alberta
spends on programme costs.
Now, I don't intend (unless someone pays me) to break out how much of that programme spending not only supports civil servants who often constitute the upper bourgeoisie of their community, given their incomes (remember that reference to the median wage of $30,000) and its multiplier effect, nor how much government money is wasted on private sector consultants and goods (well, government does not produce the goods itself), but theoretically one could model a smaller government. The point behind the figures I cited above is where do you start with a smaller government? Cut all the small-spending departments, well that's a 12% saving, yielding perhaps a $1400 tax refund for the $72,000 earner — basically a week's wages — but essentially nothing for the $30,000 earner. But I'm just playing with figures here. I'm sure there are six ways to Sunday to play this discussion (Just remember, I won't do 10%er math ... ems has the means.)
I am of two (or perhaps three) minds. There are municipal infrasctructure projects that could be speeded up (including bus-manufacturing, as more leveraged Canadians are forced to choose between the mortgage and the car lease.) There is a case to be made for social infrasctructure, nurses for example, particularly in view of the aging population. In addition, there is a case for post-secondary education/vocational training (but not, I think, for elementary teachers, given a declining enrolment). There is also a case for tax cuts — just not for people. Corporate and payroll tax cuts are far more promising to boost employment. (Unfortunately, many unions — and populists, even right-wing ones — lately seem to be wedded to the concept of a small closed economy, an autarchy where all money is merely recycled, with no productivity improvements, and hence no net gain, only economic disruptions brought about by greedy corporations that boss around the labourer and the mom-and-pop shoppe alike. I believe Marx referred to this as fetishism, the process whereby organizations and products of human beings somehow acquire superhuman characteristics, to become reified objects that somehow interact with each other outside of all human agency.
But I'll leave the last word to Krugman
How much do tax cuts and spending raise GDP? The widely cited estimates of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective.
In particular, letting businesses get refunds on past taxes based on current losses, which is reportedly a key feature of the plan, looks an awful lot like a lump-sum transfer with no incentive effects.
Let’s be generous and assume that the overall multiplier on tax cuts is 1. Then the per-year effect of the plan on GDP is 150 x 1 + 240 x 1.5 = $510 billion. Since it takes $300 billion to reduce the unemployment rate by 1 percentage point, this is shaving 1.7 points off what unemployment would otherwise have been.