Yves Smith has a nice post on the trouble with using tax cuts as your primary source of stimulus. "The problem with tax cuts," she writes, "is they may not be spent." Imagine a tax cut of $400 to a household that makes $120,000, that isn't unable to pay their mortgage but is anxious about the future. Will they spend it? Or save it? If they save it, then the tax cut was wasted money, at least as far as stimulus goes. This is not an idyll worry. "We saw it, big time, with last summer's tax rebate. Gary Shilling did a detailed look at when the checks got in the hands of taxpayers versus changes in retail spending. He concluded that about 80% of the tax rebate was saved." Yikes. Conversely, the benefit to government spending is that the money gets spent. There are a couple mitigating factors here. The first is that the government can only spend so much money so quickly. After the first couple hundred billion, you begin to run out of things you wanted to do. And some of that stuff might not even be good to do, like building endless new highways. If you need $800 billion in stimulus but governments can only quickly spend $300 billion, then a tax cut might be better than nothing. The second is that we know how to target tax cuts such that they get spent. It's simple, really. Give the money to the poor. They, after all, need to spend it. They need to pay off debt and fix the car and send in the heating bill. The more progressive the tax cut is, the likelier it is to be used.
