Numbers Say Tax Cuts Work, Spending Doesn’t

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The classic argument between supply-siders like Hayek and big-spenders like Keynes has been over how governments can stimulate the economy.

The Keynesian argument is that if government borrows and spends, or prints and spends, it can create stronger growth in the economy.

The Hayek argument is that big-spending doesn’t increase the size of the economy, but rather hurts the economy because people make poor decisions to receive the printed or borrowed money government spends. Instead, if the government simply lowers taxes, cuts spending, and keeps its ship tight, then the economy will grow, and not in the cyclic crash-boom cycle, but long-term, real growth.

I am firmly on the side of Hayek. That’s why I always support tax cuts, even if my taxes may go up. I also always support spending cuts, even if my services will be reduced. These large changes to the economy has a dramatic positive effect, many times greater than any damage I would likely suffer.

Now the data is out. For the first time in a very, very long time, we have seen our government go hog-wild with spending in the latter part of Bush’s term and the first part of Obama’s term. The economic result? Practically nothing. Compared to the Reagan and Bush tax cuts, which dramatically increased the economy, spending is a bad, bad idea. (link)

I have written before how you have to count the “multipliers”. That is, if you spend $1 in government spending, will the economy grow by $1, $1.50, $2, or more? On the other hand, if you cut taxes $1, will the economy grow $1, $1.50, $2, or more?

The multipliers can be calculated based on historical data. There really isn’t much to argue about here.

Tax cuts generally give you a multiplier of 5. That is, if you cut taxes by $1 trillion, then the economy will expand by $5 trillion. Certain kinds of tax cuts give a bigger factor, and other kinds give a smaller factor. The kinds of tax cuts that give the biggest factors are not tax cuts for the poor. They are tax cuts for investors in the form of reduced capital gains, and tax cuts for the rich in the form of reduced death taxes and a reduced marginal rate. That is, across-the-board cuts.

The supply-side effect is very real. If you allow the billionaires to keep their billions, they turn those billions in trillions. Yes, the income gap grows, and the rich become ever richer, but the poor also become richer, much richer than they otherwise would be. After all, the money the super-rich have is invested or spent in charity. One person cannot consume that much.

Government spending gives a very tiny mulitplier, probably close to 1, and in some cases lower than 1 and other cases higher than 1. It doesn’t, however, compare to the general factor of 5 for tax cuts. That is, if you have the government borrow, tax, or print $1 trillion dollars, then the economy will likely grow by about $1 trillion, but maybe less and maybe a little more.

The obvious way to expand the economy, reduce the unemployment numbers and at the same time increase the median wages and salary in real dollars is to cut taxes, dramatically. Even if it means we bring spending close to zero, it will be a massive net gain for the American people.

I support tax cuts and spending cuts not because I hate the poor, but because I love them and want to see them get rich along with everyone else. By ending government programs that cost us money, and reducing taxes accordingly, we help the poor more than if we had spent the money.

That’s right, letting a man go hungry so that a rich man can keep his tax dollars will mean the man will be far more likely to be fed.

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