Economic Effects of Spending vs. Tax Cuts

March 3, 2010

There is much debate over the differing economic performance generally of tax cuts versus spending increases. But for there to truly be a distinction, the tax cuts must not be designed in a way so as to have the exact same economic effect as a spending increase.

For example, suppose Congress passed the Millionaire's Tax Credit, which said that if you have $1 million of AGI or more, you get a $10,000 tax credit.

On the other hand, suppose Congress passed Welfare for Millionaires, which said that if you have $1 million in income or more, HHS will send you a check for $10,000.

Because every millionaire has a tax bill of at least $10,000 (i.e. implying no zero percent marginal rate range and irrelevance of refundability), there is absolutely no economic difference between these two policies. The incentives are the same. One is merely legally classified as a tax cut while the other is legally classified as a spending increase.

To say that somebody should support the tax cut because it is going to spur economic growth merely because it's a "tax cut" whereas the welfare is government waste is a sign of intellectual laziness.

(Note if the competing policies were cutting marginal rates for millionaires versus a welfare for millionaires program, there would be differing economic effects of the tax cuts versus the welfare program.)

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