Friday, February 06, 2009

Taxes vs. expenditure stimuli - on the one hand & on the other...

Paul Krugman slams the moves for tax cuts arguing that the US economy is about to fall into an abyss*.  The question really is the size of the cuts - if big enough they can provide as much stimulation as a fiscal expansion.  At times Krugman allows his Republican hatreds to override his reason.

Greg Mankiw on the other hand argues that the US should utilise a revenue neutral payroll tax cut coupled with a gradually increasing tax on gasoline.  One conspicuous advantage is that tax cuts have an immediate impact whereas well-planned fiscal investments have significant implementation lags.

The Mankiw move has its attractions.  It replaces a stupid tax on jobs which damages employment with an environmentally sensitive tax that (however imperfectly) helps reduce congestion, pollution and of course greenhouse gas emissions.  We could think about similar sorts of moves in Australia where rates of payroll tax are comparable to those paid in the US.

* That is not an exaggerated claim. 598,000 jobs were lost in the US in January 2009 with unemployment up to 7.6% of the workforce compared to 4.9% in January 2008.


Anonymous said...

at times?

Anonymous said...

Harry, tax cuts have an impact on the budget.
At some stage you have to deal with the money lost.
when recovery comes do you raise taxes or cut spending.

Unfortunately most people proposing tax cuts including Turnbull are saying rising economic activity will take care of all of this.

It doesn't.

Given the times one might think more saving and less spending would occur and it does does not have the 'big bang 'approach either

Anonymous said...

Interesting proposition Homer. It's Homer behind the anonymity, Harry. I know that bad diction from a mile off.

Unfortunately most people proposing tax cuts including Turnbull are saying rising economic activity will take care of all of this.

Are you actually saying that economic growth doesn't raise the amount of money going into the government's coffers. If you are you're an usually bad economist.

hc said...

Homer (if it is use) - additional spending must also be financed. it is no difference to tax cuts.

Anonymous said...


you might have missed it but the expenditure is finite.

Tax cuts are ongoing. How are you going to pay for them?

There is no research of any quality which shows tax cuts raise enough revenue to pay for them

Anonymous said...

Well of course you can make the tax cuts temporary, but if you tell people they're temporary they're likely to save them. Permanent income hypothesis and all that.

The Keynesians have a point about balanced budget multipliers. If the government spends the damned cash on things like infrastructure then you know it's spent, not saved. Or you can limit the cash handouts to poor people who can be guaranteed to spend it (if only on pokies!).

Cash handouts or tax cuts to people who are both able and motivated to do precautionary saving (fearing job loss and/or deflation) will tend to be saved.