Chris Dillow wonders whether tax cuts will have a stimulus effect on the economy . It is based on the idea that people will spend the bulk of any increment in their income. It is assumed that, if targetted at the poor, this is bound to be the case since those on low incomes tend to have to spend a high percentage of their income.
However, that might not be true for the bulk of people who would benefit from a basic rate tax cut. They might choose to pay down debt with it. That is particularly the case if they are facing high interest rates from loan sharks or from unsecured credit card debt. If so, then a tax cut might not work as a stimulus. Government should raise spending as well.
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