Friday, February 6, 2009

What Obama Doesn't Understand About Tax Cuts

Here is a great interview with economist Robert Barro on how tax cuts really work to boost an economy, as well as his thoughts on the Obama stimulus package. (He hates it.) But this hunk is really great:

I don't think it is really confusing at all, because when you cut taxes there are two different effects. One is that you cut tax rates, and therefore give people incentives to do things like work and produce more and pay more -- maybe, depending on what kind of taxes. And then you also maybe give people more income. This income effect is the one that's related to this Keynesian multiplier argument, where it's usually argued that government spending should have a bigger effect. So that's the income effect. But the tax-rate effect, inducing people to do things like work and produce more and invest more, is a whole separate effect, and that could easily be much bigger than the multiplier thing, than the income thing.

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