Skip to main content

Best Way to Stimulate the Economy? -- Just Cut Taxes

The failure of the stimulus package to create jobs and generate economic growth becomes more apparent each day – despite preposterous claims from the White House about all the jobs they say it has created and saved. Counter intuitively (at least in the sane world outside of Washington), the stimulus’ failure increases the risk that Congress will try to pass another stimulus package based on their perceived need to “do something” to help the still-ailing economy.

If Congress constructs the next stimulus the same way it did the last – jam packed with pork barrel spending projects favored by liberals – it will fail as miserably as the first did to create jobs and stir economic activity. That is because government spending cannot create economic growth. More government spending, whether financed by taxes or borrowing, only takes money from one sector of the economy and transfers it to another. The government creates no new spending power when it redistributes money so it creates no new economic growth.

As the Heritage Foundation has pointed out, a stimulus package that lowered marginal tax rates instead of spending massive amounts of future generation’s wealth would actually create jobs and help pull the economy out of the Great Recession. That is because lower marginal tax rates would increase the incentives of people and businesses to work, save and invest – the very ingredients needed to create economic activity.

These findings are backed up by a new study, “Large Changes in Fiscal Policy Taxes Versus Spending,” authored by Alberto F. Alesina and Silvia Ardagna – both Harvard economists. Alesina and Ardagna find that:

…tax cuts are more expansionary than spending increases in the cases of fiscal stimulus. Based on these correlations…the current stimulus package in the US is too much tilted in the direction of spending rather than tax cuts.

In addition to their findings that tax cuts are better at promoting economic growth, Alesina and Ardagna found that spending-based stimuli are actually associated with lower economic growth rates.

To reach their conclusion, the researchers studied major changes in fiscal policy in 21 countries in the Organization for Economic Cooperation and Development (OECD) – a group of the most economically developed countries in the world – between 1970 and 2007. They compared stimulus packages that occurred in these countries during that time frame based on spending increases to those based on tax cuts. They then measured the resulting impact on economic growth after the different types of stimuli took place. That way they could determine which type of stimulus had a bigger impact.

The real-world and academic evidence is clear that government spending-based fiscal stimulus does not work. Congress should heed the findings of this important new study, and the proof right before its eyes, that spending more money does nothing to help the economy. It should come to this realization before it embarks on another stimulus package predicated on more spending instead of marginal tax rate cuts.

If it is serious about helping the economy and creating jobs for those out of work, Congress should put aside its ideological predisposition to spending and lower marginal tax rates to get the economy moving again and put unemployed Americans back to work.


Popular Video