Wednesday, November 02, 2011

Stiglitz: Increase taxes, spending to kick start economy

From an email sent by Canadians for Tax Fairness:
"Increase taxes to increase government spending and lower deficits and debt is the best way to kick-start the economy said Nobel Laureate Joseph Stiglitz in a speech in Toronto recently. He was very critical of the way G20 leaders have been dealing with the Global Financial Crisis, calling the austerity strategy adopted at last year’s G20 in Toronto a “suicide pact” that would lead to reduced growth.

He argued instead that governments should increase taxes and government spending, dollar-for-dollar. Since the increase in government spending is completely offset by an increase in tax revenue, there is no need to go further into debt to stimulate an economy. Each $1 increase in government spending can translate into more than $1 of economic impact. For example, if the government pays for a bridge to be built, the money to pay for the labour will in turn be spent by the workers.

If you increase taxes, consumer spending is not decreased on a dollar-for-dollar basis because while some households would pay for the tax increase by decreasing spending, others would continue to spend and pay for the tax increase by saving less. So a $1 increase in taxes, for example, would translate into less than a $1 decrease in consumer spending, and generate more than a $1 in economic activity because of its multiplier effect of government spending. A portion of the government spending would also be recovered in increased tax revenue resulting from lower unemployment.

He might have also noted that tax cuts are a very poor way to stimulate the economy as a much of the stimulus effect will be lost to savings or to spending on imported goods."


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