How do you Stimulate an Economy? Part 4 - Taxing to Spend

In light of my previous post on the benefits of government spending, you might wonder why I claim that reducing taxes is the better option in an even earlier post.

The problem is that both are necessary for a healthy economy.  Government spending is beneficial to the economy, but low tax rates are also beneficial.  The problem is that one requires the opposite of other (though you can delay the taxation by increasing debt).  So if you increase government spending (good), you have to increase taxes (bad) or if you decrease taxes (good) you have to decrease spending (bad).  Either extreme is bad so it isn't a question of which is better for the economy, the question is what is the correct balance point.

In both cases the benefit is diminishing as you increase the levels.  Increased spending when spending is very low has a much higher benefit than it does when spending is high.  The same is true for taxes, the lower the rate the less benefit you have from lowering it further.

For me it is less a question of which is better and more of a question of where the balance point is.  There have been times when using spending would offer benefit despite the necessary raise in taxes and others where the reverse is true.

As for where we are at in the US today, I don't believe that increased spending is going to have an overall positive effect.  The outstanding debt is far to high and is rising far too quickly in an unsustainable way, which means taxes will have to increase to cover the cost.  The concern on what that increase will be, who it will affect, and when it will happen is having a hugely detrimental effect on the economy already. While there are many positive aspects to the spending programs which have been put in place in the past year, they also come with that significant negative.

That negative is compounded by the uncertainty of how the deficit will be handled, especially in light of how much debt the US has and how quickly it has risen.   The ability of the US government to continue spending on credit has a limit and there are signs that limit is approaching.  Further spending is going to exacerbate the problem even as it provides the benefits I have mentioned.

If the US had limited or no debt, then spending might be a good answer, though it does come with some risk.  With spending levels already high and debt levels very high, I believe that the overall effect of increased spending not only doesn't help the economy, but I believe there is overall harm being done.