MCViewPoint

Opinion from a Libertarian ViewPoint

Do We Want Real Tax Cuts? How About Cutting Government Spending?

Posted by M. C. on September 1, 2022

Government is not a wealth generator, as it relies on its sources of funding on the private sector. If government could generate wealth, then obviously it would not need to tax the private sector.

We conclude that it is not possible to have a effective tax cuts without a cut in government outlays. A so-called tax cut while government spending continues to increase is just an illusion.

https://mises.org/wire/do-we-want-real-tax-cuts-how-about-cutting-government-spending

Frank Shostak

According to many economic commentators, an effective way to generate economic growth is through the lowering of taxes. The lowering of taxes, it is held, will place more money in consumers’ pockets, thereby setting in motion an economic growth. This way of thinking is based on the belief that a given dollar increase in consumer spending will lift the economy’s gross domestic product (GDP) by a multiple of the increase in consumer expenditure.

Assume that out of an additional dollar received individuals spend $0.9 and save $0.1. Also assume that consumers have increased their expenditure by $100 million. Because of this, retailers’ revenue rises by $100 million. Retailers in response to the increase in their income consume 90 percent of the $100 million—i.e., they raise expenditure on goods and services by $90 million. The recipients of these $90 million in turn spend 90 percent of the $90 million—i.e., $81 million. Then the recipients of the $81 million spend 90 percent of this sum, which is $72.9 million and so on. Note that the key in this way of thinking is that expenditure by one person becomes the income of another person. At each stage in the spending chain, people spend 90 percent of the additional income they receive. This process eventually ends, so it is held, with total output higher by $1 billion (10*$100 million) than it was before consumers had increased their initial expenditure by $100 million.

Observe that the more that is being spent from each dollar, the greater the multiplier is and therefore the impact of the initial spending on overall output will be larger. For instance, if people change their habits and spend 95 percent from each dollar the multiplier will become 20. Conversely, if they decide to spend only 80 percent and save 20 percent then the multiplier will be 5. All this means that the less that is being saved the larger is the impact of an increase in overall demand on overall output.

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