T-Bone on Tax Breaks Without Spending Cuts

PGL has had a number of posts in which he notes that cutting tax rates without cutting spending is little more than defering taxes. Reader T-bone (reachable at tim of mars, all one word, at gmail) sends some additional thoughts:

Regarding looming deficit, it seems Bush has given tax breaks but without decreasing spending. This seems like having your cake and eating it too regarding economic growth. Shouldn’t we be booming with economic growth with this unsustainable policy? When people point to minor inprovements in growth to support this policy, all I can think is “You expected worse???”. So this current economic policy answers the question of what is better, spending increases or tax breaks, with the answer: BOTH!

I would bet if we had to substitute some spending to pay for the bush tax cuts to keep a balanced budget, the economic growth would decline compared to no cuts and keeping the spending. Though to prove why spending is generally more efficient would require another in depth analysis that strays from this topic. But the short answer is that spending tends to employ new people either who had no income or who now give up their previous jobs to someone who had no income, which is similar to a tax break for the poorest. I’ve also argued elsewhere that the spending habits of the people with less money tends to instantly create demand when given more money, whereas wealthier people tend to store the money in a banks/investments, which increases investment availability, not demand.

Regarding the relevance to the actual needs of the country, I also have some theories on the “quality” of the growth of GDP that comes from tax breaks for the wealthiest.

For example, what added benefit would we get if a wealthy person uses his newfound wealth to get a custom made car that takes 15 times the effort and personel to create compared to the production-line stamped-out lexus he would have bought without the tax cut? Or what if he just hired a few more servants to wipe his butt? The only real benefit is that it employed a few people for a while. And this is only in cases where the wealthy person has spent the money rather than saved it.

How is that end result different from if the government employed some people to sit around all day. Money still gets to the people who will spend it on the more efficiently created goods, except now the wealthy guy has to wipe his own butt. And imagine if those government employees actually were employed to serve the public in ways that do not compete with private sector goods and services.