Tax Cuts Do Tax Cuts

Tax Cuts

Do tax cuts actually stimulate the economy? The verdict is still out with roughly half (51%) of Americans favoring an across the board tax cut for all Americans to stimulate the economy (51% Say Cut Everybody's Taxes to Stimulate the Economy, 2009). Those who see the rosy side of tax cut effectiveness typically believe that if taxes are cut, people can consume more simply because they have more money to spend. As a result of the increased consumption, the economy grows, creating a larger tax bases. Therefore, government revenues will remain the same or they may even increase. However, many believe the tax cut situation is far more complex and needs to be quantified by many factors. Beaton (2003), for one, discusses why he believes who gets the money is important.

The Marginal Propensity to Consume (MPC) is the percentage of an additional dollar received that will be spent as opposed to saved. Less wealthy people, explains Beaton (2003) have a higher MPC -- they'll re-spend all the money they receive because they need the money to cover their basic necessities. On the other hand, higher income people have a lower MPC than poor people, meaning they will save or invest more when they receive additional money rather than spending the money. Beaton also adds that low and moderate income people tend to spend money on goods and services that are more likely to result directly in jobs and incomes in the community (the spending continues multiplying on a secondary or tertiary basis). Higher income people spend in a way that contributes to "leakage" to their local economy by taking trips to buying non-local goods and services.