Tax Cuts and Aggregate Demand

by Don Boudreaux on July 20, 2010

in Budget Issues, Complexity & Emergence, Debt and Deficits, Myths and Fallacies, Stimulus, Taxes

Here’s a letter sent yesterday to the Wall Street Journal:

Alan Blinder asserts that opposition by tax-cut proponents to further increases in government spending is inconsistent (“Obama’s Fiscal Priorities Are Right,” July 19).  Not so.

Viewing reality through a Keynesian template, Mr. Blinder perceives tax cuts as “stimulating” the economy only in the same way that government spending does: by increasing aggregate demand.  In fact, though, the chief argument for tax cuts is not that they increase aggregate demand but, rather, that they increase the return to productive effort and risk-taking.

Perhaps I and other advocates of tax cuts are mistaken to predict that letting producers and risk-takers keep more of the fruits of their efforts will boost employment and economic growth.  Regardless, our advocacy of tax cuts not only is consistent with our objection to more government sending – it demands such an objection because higher government spending inevitably entails higher taxes.

Sincerely,
Donald J. Boudreaux

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