Keynesian Macro 101:

The Difference Between Tax Cuts and Spending Increases

What, exactly, is the difference between a good tax cut and a good spending increase?  The simple answer: everything.

From the consumer’s position, fairly little has changed: there isn’t much of a difference between a $1,000 tax cut, and a $1,000 increase in spending.

From the government’s position, however, a great deal has changed.  Spending, traditionally, has been believed to have a higher multiplier effect on an economy than tax cuts, but more recent research suggests that this is not the case; due to tax cuts’ power to increase investment in capital stock, and government’s inability to spend all of such stimulus quickly (note how much of our stimulus has not been spent yet) it seems that cutting taxes will help an economy more than spending will.  When coupled with cutting the appropriate taxes (such as capital gains, dividends, and corporate taxes) it seems that tax cuts can be far more powerful than spending increases.  For more information on this topic, see Greg Mankiw’s insightful post on the subject.

If we were to stop here, however, we would be missing the most important thing: increases in spending foster big government.  They stimulate the economy, but not as much as they stimulate the government.  When, on the other hand, taxes get cut—long-term, permanent tax cuts—government is cut too.  That is, for any conservative, tax cuts achieve our goal of limited government.

So, if we have the choice between high taxes and high spending, or low taxes and low spending, what would be better for the economy?  Cutting taxes.  What would be better for America?  Cutting taxes.  What does America think would be better?  Cutting taxes.