Argument: Measures that encourage saving help stimulate the economy

Issue Report: Bush economic stimulus plan


  • Brian M. Riedl. “Tax Rebates Will Not Stimulate The Economy”. Heritage Foundation. January 10, 2008 – “The same critics respond that redistributing money from “savers” to “spenders” will lead to additional spending. That assumes that savers store their savings in their mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (where it finances business investment) or deposit it in banks (which quickly lend it to others to spend). Therefore, the money is spent whether it is initially consumed or saved. Given that reality, isn’t it more responsible for the saver to keep that money and save for a new home or their children’s education, rather than have Washington redistribute it to someone else to spend at Best Buy?
Simply put, low tax rates encourage new wealth creation. Tax rebates merely redistribute existing wealth.
Take the 2001 tax rebates. Washington borrowed billions from the capital markets, and then mailed it to families in the form of $600 checks. Predictably, consumer spending temporarily rose, and capital/investment spending temporarily fell by a corresponding amount. This simple transfer of existing wealth did not encourage productive behavior. The economy remained stagnant through 2001 and much of 2002.
It was not until the 2003 tax cuts — which instead cut tax rates for workers and investors — that the economy finally and immediately recovered. In the previous 18 months, businesses investment had plummeted, the stock market had dropped 18 percent, and the economy had lost 616,000 jobs. In the 18 months following the 2003 tax rate reductions, business investment surged, the stock market leaped 32 percent, and the economy created 5.3 million new jobs. Overall economic growth doubled.
Thus, both economic theory and practice show the superiority of tax rate reductions over tax rebates.”