The traditional economic thinking on stimulus is based off of the Keynesian notion that government spending and tax cuts can ‘stimulate’ an economy. This theory has been put to the test with the recent economic collapse, and the results are in: tax cuts work better than spending to stimulate an economy.
Harvard Economists Alberto Alesina and Silvia Ardagna propose in their new paper that “Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.”