Mia asked in Social ScienceEconomics · 1 decade ago

Why do we need tax cuts now? Why do we see budget deficits going up during the recession?

What is 'Crowding Out' effect?

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  • 1 decade ago
    Favorite Answer

    Budget deficits occur when less tax income is coming in than what is being spent (on the way out)

    Tax cuts now would be considered a beneficial item if we rested on the right point of the Laffer Curve. http://www.heritage.org/Research/Taxes/bg1765.cfm

    Crowding out as it pertains to investment comes when the government chooses to take all the opportunities available to invest and creates a government program instead of the private industry doing the investing. This crowds out investment, thus lower employment, lower amounts of money multiplication, and lower GDP overall. Few Economists believe that government investment money multiplication occurs even close to the level of the private sector.

    Source(s): B.S. in Economics. Market Analyst
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  • meg
    Lv 7
    1 decade ago

    . During recession government revenues fall and expenditures increase due to unemployment benefits and an increase need for welfare by people who have lost their jobs so the deficit grows. This increase the demand in the economy and so reduces the effect of the decline in investment spending and tax cuts adds even more to demand. Crowding out occurs when the government borrows money that would otherwise be borrowed for private investment but during recession private investment falls so there is unborrowed money in the economy.

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  • 1 decade ago

    Tax cuts do two things:

    a) give people more to spend but

    b) give the government less to spend.

    So if you look at the big picture including those government employees about to be fired due to the tax cuts, the result is zero useful effect, although the distribution of money is changed.

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