Does a $1 tax cut have the same effect on GDP as a $1 increase in government expenditures?

3 Answers

  • 10 years ago
    Favorite Answer

    It depends on the type of tax cut.

    One time fiscal shock tax cuts like the bulk of the current stimulus and the one in 2001 do little to promote behavioral change. People are (typically) smart enough to spend based on their long-term earning expectations. This is why permanently cutting tax rates is so beneficial - it incentivizes people to work, invest, and take more calculated risks, because they know they will be allowed to keep more of the fruits of their labors.

    Short answer to your question: permanent tax cuts are better than government expenditures are better than temporary tax cuts.

    P.S. I assume you are asking this as a trick question given the recent studies that show that the temporary tax cuts in the current stimulus were less effective than the government spending that was included. Be careful not to argue using half-truths.

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  • No. It actually helps.

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  • Pfo
    Lv 7
    10 years ago


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