Friday, December 19, 2008

Why Tax Cuts are Better Than Spending in This Economy

Obama's economic team is taking a knee jerk reaction to deal with the current economic malaise. Spending our way is not going provide the solution. Enacting REAL tax cuts is far more effective.

According to Greg Mankiw.

Suppose, for example, that tax cuts are not lump-sum but instead take the form of cuts in payroll taxes (as suggested by Bils and Klenow). This tax cut would reduce the cost of labor and, if labor and capital are complements, increase the demand for capital goods. Thus, the tax cut stimulates demand not only by increasing disposable income and consumption spending (the textbook Keynesian channel) but also by incentivizing more investment spending. A similar result might obtain if the tax cut included, say, an investment tax credit.

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