Monday, February 12, 2018

Why Tax Cuts for Rich Dude Will Lead to Little Stimulus

Over at Brad DeLong’s blog jonny bakho adds an interesting comment:
How much stimulus did the GWBush tax cuts provide? They came during a recession followed by "jobless recovery" made somewhat better by the housing bubble, then burst big time in 2008. How different would the multiplier be if given to infrastructure repair and broadband extension, investments that create domestic jobs? In a global economy, tax cuts to the investor class are spent globally. Tax cuts for investors can theoretically speed the process of offshoring if most of the good investments are in foreign countries, a negative domestic stimulus. In a global economy, all "stimulus" is leaky. To be a truly domestic stimulus, tax cuts and spending must be carefully targeted. GOP tax cuts in 2001 and 2016 were both designed to enrich wealthy patrons, with little attention to targeting for domestic stimulus
For some reason I could not add to his comment there so I decided to post my thoughts here:
Make that the 2017 tax cut and add in the 2003 tax cut and I agree. First of all the marginal propensity to consume for rich dudes (MPC-rd) is likely quite modest and the impact effect = the tax cut for our rich dude times (MPC-rd minus his marginal propensity to import). If this rich dude takes his trophy wife to Rodeo Drive to spend $1800 on a Louis Vuitton bag – that bag was made in France.

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