Tax Cuts Vs Fiscal Stimulus

Even more proof that tax cuts are better at stimulating the economy than fiscal stimulus. Bruce Bartlett describes the recent research by Harvard economist Robert Barro:

Harvard economist Robert Barro is out with a new paper that undoubtedly will get a lot of attention from conservatives.  First, he finds that the multiplier effect from government purchases is well less than one; meaning that each dollar of government spending adds less than a dollar to GDP and is, therefore, contractionary rather than expansionary. Second, he finds very powerful effects from cuts in marginal tax rates; a one percent cut raises the growth rate of GDP per capita by 0.6%. Barro also provides a very useful time series of average marginal tax rates, including Social Security and state taxes, from 1912 to 2006.

The full post can be found here. In short,  as conservatives argued at the beginning of the fiscal stimulus debate: tax cuts are better at stimulating the economy than fiscal stimulus. This research confirms earlier research that found the fiscal multiplier of Obama’s recent fiscal stimulus to be zero, see here.

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