Is this good for the economy or bad? I don’t know much about it but you’d assume if tax money is just redistributed into healthcare, social security and other programs it will just end up back in the market. Is tax/spend good for the economy or are tax cuts better or is the difference negligible. Tax cuts and increasing taxes both seem to have the same effect, more money is spent. So why have I heard the stereotype that tax cuts boost the economy and taxes are bad for the economy? Is it because taxes lead to smaller growth since companies go offshore?
It seems to me like tax and spend should be better for the economy than tax cuts, because people given tax cuts do not spen all the money given back to them, whereas the government would. For example, if the government takes x dollars and then spends all of it, the entire quantity goes into the economy, but if it gives x dollars to people, not all of it will be spent. People with higher incomes are less likely to spend it, so if the government is going to give a tax cut, it would be best to give it to the lower and middle classes siince they will spend a proportionally larger amount of it.
True. And you’d assume taxed money would get spent domestically. Someone who is uber wealthy who gets a tax cut may buy things like foreign wines, international vacations and foreign cars while tax money will be spent on domestic goods and services.
Aside from the fact that higher taxes can lead to corporations not wanting to set up shop in a certain area high taxes seem better for the economy than tax cuts.
Its just Macroeconomics 101.
Its called the Marginal propensity to consume. When you have more than enough money than you need (through earnings or whatever) you save a certain amount and spend a certain amount. The money that you spend which may be 80 percent of what you got, will go to someone else, who will then spend 80 percent of that. So that’s why tax cuts have that effect. If the Federal Govt spends that, it all gets spent on the first iteration
But it does help with equality and income distribution. However the more you tax the rich, the more poorly your economy will do as a whole because the main engines of the economy will have less motivation if they get taxed to death.
But in the end, you’ll wind up with less poverty. Look at Europe, they have higher taxes, but less poor people. But their economies are always sort of languishing.
I’d say its actually bad for the economy, but good for poverty, and other methods of determining well-being. Whether or not there will be consequences is another question.
I don’t understand. If the Federal Gov’t spends the money, it still goes to businesses and individuals who will then spend the same 80%.
Yes. The idea is that there is an extra round of 100% government spending before the 80% people-spending happens.
If it’s up to me, I’ll spend 80% of my money, then the people I give it to will spend 80% of that, etc. So the total is .8 + .8[sup]2[/sup] + .8[sup]3[/sup] + …
If the government taxes my money, then they’ll spend 100%, then the people they give it to will spend 80%. The total is 1 + .8 + .8[sup]2[/sup] + .8[sup]3[/sup] + …
Tax and spend is usually better than not taxing and still spending. But even at that, public debt is not like a credit card. Governments don’t go bankrupt, generally speaking, since they control the money supply. So long as they keep inflation from running away, we’re more or less ok with most levels of debt.
As others have mentioned, the big factor is what you do with your spending. Bailing out airlines might not have a positive effect, because it encourages the inefficiency which caused them to need bailing out in the first place; on the other hand, bailing them out for a bit and slowly letting them die might make the transition to efficiency smooth and relatively painless. Spending money on public transportation is usually a sinkhole, monetarily speaking, but it cuts congestion and pollution which have extra-market benefits, and there is the possibility of bringing more people into an area which can have a positive indirect effect on the local economy. Such benefits might be considered more valuable to a society than the alternative. Working hard to eliminate poverty and setting up a good welfare system can in principle remove incentives to work for some portion of the population, but if the alternative (more poverty and homelessness) is an anathema then the cost is simply worth bearing.
The last sentence about the cost being worth bearing is generally the idea behind deficit spending. We are mortgaging the future, telling ourselves that we can use tomorrow’s money better today. If we’re using our money wisely, there isn’t a very large concern: the government sells bonds to the wealthy, uses the money raise to fund federal programs, which then earns the wealthy more money (eventually), and raises tax revenues, which are used to pay the old bonds back, etc. Simplistic picture, of course, but that’s the general idea. When the majority of public debt is owned by citizens, it is just money we owe ourselves on the justification I give above. Many worry, though, that foriegn investment in the bond market is not so good. So tax some and spend more might not be ok when too many foreigners are buying our debt… though, honestly, I’m not clear on why that is, and I’d like someone to fill that blank in if they could.
Deficit spending by the government for things like infrastructure and promising research is a no-brainer for me. The consequences of a healthy infrastructure are, IMO, impossible to overestimate. Highways, electricity, and communication are simply an excellent way to get an economy going or keep it going, but the large initial investment can discourage private investors from going forward with it. Here, a government with theoretically infinitely deep pockets is the clear choice for handling the situation because we can spend tomorrow’s money better today, especially when spending today makes a better tomorrow.
I think this line of reasoning ignores an essential factor.
If the government taxes my money, then I will refuse to make that money in the first place. I think it has by now been well established that too-high tax rates can form a significant disincentive to productive work.
http://www.ncpa.org/abo/inthenews/NationalP.html
Opposing views:
It’s clear the very high tax rates are a disincentive, but we are nowhere near those. The proposal is to go back to the pre-Bush rates for those making over $200K. Did those rates make you work less? They sure didn’t make me work less, and I would venture a guess that they were not a disincentive at all.
I sure wish people would stop using this not very good argument. It’s like Republicans just wish the '90s, with a boom under conditions which should have caused a bust in their theories, would just go away.
But the gov’t doesn’t spend 100% of what you send in. Isn’t there considerable overhead? Let’s say I send $1 dollar to the gov’t. What portion of that is actually spent/ given to someone else and what portion is spent paying the people and offices created to distribute that dollar?
Depends on how they use it. If no one benefits from what they spend it on, it’s definately bad. If they spend it in a good way, but something that the market would have done anyway, it’s neutral except the waste in supporting a useless buracracy. If they spend it in beneficial way on demands that are not adequately represented in the free market, it is surely beneficial.
I would think that those who say that tax and spend is bad for the economy think that the majority of govt. spending is in the first two categories, and those that think tax and spend is good for the economy think that the majority of govt. spending is in the third category.
A more specific question might be, is taxing and spending as we currently do good or bad for the economy?
Yeah but overhead is still an expenditure. The money goes to gov’t employees etc. who then spend/save it.
At the risk of repeating Leonard, I think the whole thing is really just a catchphrase. No one these days actually advocates that we should “tax and spend” on a bunch of worthless crud we don’t need just to stimulate the economy. Everyone thinks we should tax as little as possible so long as we are still able to “promote the common defense, promote the general welfare” etc. etc.
The real argument made by those who use the phrase is that such and such a program is not necessary and so we should eliminate it to lower taxes, which will in turn help the economy more or less as much as putting the money into the worthless program did.
Let me turn this around. Some of the most successful countries in the world are the über-tax and spend nations of Norway, Sweden, Denmark and Iceland, both in terms of GDP per capita and the UN Human Development Index.
It’s not a matter of tax and spend or not, the issue is way more complex than that. For example, if taxes are high but the money goes to Social Security paying off retirees, then it’s money out the window, even though the money goes back into the economy. However, if taxes are used to invest in education, healthcare and infrastructure that’s entirely a different matter.
Macroeconomics 101 tells us that enough money has to be kept away from public sector to encourage private investments and stimulate economic growth. But we also know that too much money left in private sector result in wealth concentrated on fewer hands, leaving a country with a group of poor second class citizens who then becomes a burden on society, in terms healtcare, welfare and crime.
I’ve never bought into the idea of “consumer-driven economies” (America), any more than the idea of “savings-driven economies” (Japan). IMO, you need a healthy mix of both. However, nothing is more important than fiscal responsibility.
As others have said, it really depends on the details. For instance consider an economy where there is an excess of production capacity over demand. The rich have a lower marginal propensity to consume, so much of this tax cut would be invested. Given that there is an excess of production capacity it is unlikely this would be invested in even more production capacity as it wouldn’t be profitable. So you might expect a great deal of this money to be invested abroad where returns are better. This would help the balance of payments in the long term, but doesn’t really do much for the economy now. Conversely, increasing taxes on the rich while lowering them on the poor would boost the economy as the poor are more likely to spend it on goods and services. The effect is reversed of course if there is an excess of demand over production capacity.
At the end of the day, changes in government taxation and spending redistribute money from one group to another. The effect on the economy depends on who you are taking the money from, and who you are giving it too.