Anonymous
Anonymous asked in Social ScienceEconomics · 1 decade ago

Which is better for the economy: tax cuts or government spending?

where does the government so much money to spend?

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  • Anonymous
    1 decade ago
    Favorite Answer

    The first thing I learned in my intermediate econ class is that when posed this question, any good economist will reply, "It depends." Countless variables constantly shift around providing different scenarios which will make any particular policy affect the economy drastically different depending on the circumstances.

    As a general stance however, I much prefer tax cuts over government spending. GDP (the primary measure of economic health) is comprised of C (private spending), I (private investment), G (government spending), and NX (foreign spending). Consider that anything the government spends must come from somewhere. To raise the money to spend in the first place, G must either tax, reducing C, or borrow, reducing I. The reverse is also true, with a decrease in G causing an increase in C or I.

    These transfers must pretty much offset each other, leading to no real difference in GDP. However, since the private sector is the 'native' state for most wealth, in order for government to spend it, it has to go through the extra step of that transfer from the private sector to the public sector by taxes or loans, leading to an unneeded inefficiency in how the money gets around--it's just one extra step that might as well not be made.

    Also note, this is from my perspective that efficiency is more important for the economy than equity. Somebody who wants more equity would probably consider the inefficiency of getting the money to the government a small price to pay considering the increased equality that would provide.

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  • 1 decade ago

    Tax cuts keep money in the private sector. Government spending may temporarily prop up the economy, but does not facilitate any real economic growth. Plus, the government needs to borrow or tax in order to spend more during a recession. Both are counterproductive to economic growth.

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  • SDD
    Lv 7
    1 decade ago

    If the economic productivity of private investment is higher than that of government investment (which has certainty historically been the case), then anything that allows more resources in private hands is preferred.

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