January 9, 2009 12:13 PM | | Bookmark and Share

President-elect Obama and Congressional leaders are discussing plans for economic stimulus legislation to be enacted in the coming weeks or months. The two-year package being discussed is said to cost around $775 billion and a surprisingly large $300 billion of that would go towards tax cuts. All of it would be deficit-financed.

As explained in a previous report from Citizens for Tax Justice, a large increase in government spending, even if it is deficit-financed, may be justified as a way to boost demand and mitigate the current economic downturn. Most economists believe that the current recession is caused largely by a drop in demand for goods and services. The federal government can increase spending in ways that lead to an immediate boost in consumption so that businesses are less likely to have to cut staff or close, and thus help keep the downturn from reaching a level of severity that is truly destructive and more difficult to reverse.

Tax cuts are generally less effective in stimulating demand than direct government outlays. But tax cuts targeted to the people who are most likely to immediately spend any money they receive, namely low- and middle-income people, are more effective than upper-income tax reductions. Tax cuts for business are far less likely to be an effective stimulus.

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