On the other hand, proponents of Keynesian economics and related theories often criticize tax rate cuts for the wealthy as being "trickle down", arguing tax cuts directly targeting those with less income would be more economically stimulative. Keynesians generally argue for broad fiscal policies that are direct across the entire economy, not toward one specific group.
The NYTimes has taken up the argument to a group of experts in a new section Room for Debate. These are the different arguments, which surprisingly, seem to point to a kind of consensus:
William Gale advises:
The Congressional Budget Office recently considered 11 options for stimulating the economy and extending the tax cuts tied for least effective. Policy makers could do far more good for the economy in the short run by allowing the same increase in the deficit as would come from extending the tax cuts (or the tax cuts that help only high income households) and using the money instead to pay for infrastructure and investment programs and aid to the states so that they can avoid laying off workers.
Laura Tyson writes:
Trickle-down arguments in favor of tax cuts focus on their effects on supply, not demand. According to trickle-down logic, letting the Bush tax cuts expire for top taxpayers will reduce how much they work and how much they invest, not how much they consume. Samuelson makes a trickle-down argument when he warns that higher taxes for top income earners will discourage small business activity. But less than 2 percent of tax returns reporting small business income are filed by taxpayers in the top two brackets, so 98 percent of small-business owners will not be affected if the Bush tax cuts for these brackets expire. Moreover, the trickle-down theory about the relationship between tax rates and economic activity, even though it has superficial appeal, is not supported by the evidence.Linda Beale explains:
These arguments essentially amount to a claim that a tax cut for the wealthy is the best use for the $700 billion in additional revenue the cut would cost over 10 years. Yet respected studies have shown that tax cuts are not the most effective way to stimulate the economy. The affluent will still spend, even if they cut back a small amount: generally, higher taxes merely lead the affluent to save less.James K. Galbraith asks:
But let's also ask: Is supporting the private consumption of a wealthy minority really a national goal? Is this the motor we wish to drive the economy forward? Should we go on expanding the frontiers of high living, while teachers and police face layoffs and parks and libraries close?Matthew C. Weinzierl:
As important, these tax increases will not threaten the recovery. The taxpayers fortunate enough to qualify for them are unlikely to reduce spending substantially in response. In normal times, these households save a greater share of their incomes than Americans who earn less, so changes in their incomes translate into smaller changes in spending. Today, when the government has built up a large debt, these households rationally expect much of that debt to be repaid through increased taxes on them at some point. If they are not asked to pay higher tax rates now, they will simply save much of the excess for the day when they are.After hearing the experts. What's your take?
(Go back to the initial page here).
