Robert Barro, a noted Growth Economist had written an article in WSJ on the fiscal multipliers. His main idea is that tax cuts are better than government spending and a fiscal stimulus should focus on the former. The government spending works but only in war times.
Why tax-cuts are more stimulative?
I don’t think it is really confusing at all, because when you cut taxes there are two different effects. One is that you cut tax rates, and therefore give people incentives to do things like work and produce more and pay more — maybe, depending on what kind of taxes. And then you also maybe give people more income. This income effect is the one that’s related to this Keynesian multiplier argument, where it’s usually argued that government spending should have a bigger effect. So that’s the income effect. But the tax-rate effect, inducing people to do things…
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