Tax cuts are not good stimulus - Part III

CPJ has noted before that tax cuts are not good economic stimulus. Many economists agree that they provide less “bang for the buck” than direct government spending, and in this current economic climate, many people will choose to save rather than spend their tax cut money.

Today, the Canadian Centre for Policy Alternative released a report suggesting that tax cuts might be worse than that – rather than failing to provide good economic stimulus, they might actually harm the economy.

This is because interest rates are close to zero. Tax cuts might therefore actually increase the recession by increasing “real interest rates” – actual rates minus inflation. The result would be a decrease, not an increase, in GDP.

This suggests, once again, that tax cuts were not the right road to go down to stimulate the economy. Devoting the same amount of revenue that will be lost through tax cuts to investments in social infrastructure would have been a more effective, efficient means of delivering stimulus.