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Should We Cut Taxes in this Economic Climate?

Question: Since the beginning of the Reagan revolution, there has been a strong effort at state and local levels by both Republicans and Democrats to cut taxes in order to spur economic growth. Given the fact that many state governments across the United States are running deficits, do you believe it is unwise in this current economic crisis to cut taxes further?

In other words, regardless of the economic climate, is it prudent to believe that government should operate with less revenue?

Paul Solman: That’s not an “in other words,” but two separate questions.

To the first, I’d say it may well NOT be unwise – in other words, it may be WISE – to cut taxes in the current crisis, especially to cut taxes for the less-well-off; the bottom 80 percent of us, say. Why? Because if the economy swoons once more and people are afraid to spend, who’s left to spur job growth but the government, the spender of last resort?

But mightn’t it make sense that people, and not the government, choose WHAT to spend the money ON? In which case, the government can borrow and/or create money and give it to US, in the form of tax cuts.

That’s a version of the so-called “Keynesian” solution – government action to stimulate a listing economy. See our best and liveliest explanation of the debate around from last month.

Your second question – should government in general make do with less? – begs a general answer: It depends how government spends our money. On a war machine to defeat Hitler and Hirohito? Seemed like a good idea at the time, even though the federal deficit shot up as a percentage of our annual economic output (GDP). More Sea Wolf nuclear submarines? Maybe not. Triboro Bridge? Well, who else was going to build it? Causeway to Nowhere? You get the point.

In short, “how much government spending?” reminds me of “when does borrowing reach its limit?” The answer to both: “It’s not how MUCH; it’s what you do with the money.”

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