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Comment by freehunter | Hacker News Reader

You wouldn't necessarily need to. It would lower one kind of tax stream, but giving people more money to spend would increase others by a similar amount. If I had another $500 of free money, I would most likely spend that on something that is taxed. Possibly something that's taxed at a higher rate, or something that contributes to the GDP.

We give tax breaks to companies all the time with the explicit understanding that they will cover that loss just by the mere fact that they exist and are spending money.

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Didn't we try that in the 80s, nation-wide, to ill effect? (Until Bush realized it was unsustainable in his second year and raised taxes again?)

My history is a bit fuzzy having just woke up.

Well, not all groups do the same thing with their newly reclaimed income. If memory serves, lower income folks will tend to spend all of it because, well, it's expensive to be poor and they're trying to catch up to some basic level standard of living. Middle class – it's a mix, but much of it gets saved or invested. The rich – they don't spend the extra money – they invest it (often avoiding taxation or comparable taxation).

So, IF that's true, it might make this more viable because the rich and upper middle class are less likely to be holding student loans, and thus, this money is more likely to be spent.

What doesn't work is giving tax breaks to companies in the hope that they'll hire more people. That's called trickle-down economics, and you're right. We tried it, and it didn't work. Companies and rich people tend to just save the money instead of spending it. What does work is giving tax breaks to normal people, who will then spend that money on something that benefits the economy. It's the trickle-up effect.

If you gave me $500, I'd buy a new dishwasher. But a rich person doesn't have to save money to buy a new dishwasher. Giving them more money isn't going to change their life in any appreciable way. Everything they want, they already have. But poor people want/need a lot of things they can't afford. Giving them a tax break means they can now afford to buy things they previously couldn't, which means Whirlpool sells more American-made dishwashers, hires more American employees, and pays more American taxes.

Oh and the reason Bush raised taxes in the 80s is to pay for a war. You can't fix the deficit, cut taxes, and go to war. War is expensive.

I think a more likely scenario is people take the $500 and use most of it to pay bills or pay off credit card debt. They then take whatever money is remaining and go out to dinner, buy toys for their kids, etc. The real effect of the tax break on growing the economy is muted quite a bit in this scenario.

How does paying bills and credit card debt mute the effect of the tax break?

Bills need to get paid. If I'm paying my bills with "free" money, that means I have other money to spend on other things. If I'm paying off credit card debt, it means I have those interest payments available to spend now.

The only way to waste money from the economy's standpoint is to save it. As long as it's being spent, it's being spent well. And as long as it's being spent on something that you pay taxes on, the government wins too.

I am just trying to say that if someone uses the tax break to pay off a portion of debt or to pay for bills and not have to get a payday loan, it doesn't have the same immediate effect as if they go and buy a dishwasher. Yes, they end up paying less interest on their debt over long run, which gives them more money to spend (or save). But these gains are realized in there being less interest in the monthly debt payments, and I think in this case the gains are more likely to be saved rather than pooled to make a large purchase.

On a more fundamental level tax breaks to increase tax revenue is largely doomed to fail just because each dollar you cut has to be replaced by multiple times that amount spent in other tax streams to make up for it.

The US economy did far better in the 1980's than it has in the last 10 years (average of ~3% per year). Employment was 5.3% in 1988.

US GDP growth from 1980 to 1988[1]:

1980: 9.62%

1981: 9.69%

1982: 3.79%

1983: 11.4%

1984: 9.62%

1985: 7.37%

1986: 4.86%

1987: 7.57%

1988: 7.76%

[1] http://www.multpl.com/us-gdp-growth-rate/table/by-year

> Didn't we try that in the 80s, nation-wide, to ill effect?

Not exactly; Reagan's "biggest tax cut in history" on income taxes was followed very quickly by his less-frequently-remembered biggest tax increase in history (on payroll taxes), and so was really just part of the biggest tax burden shift in history from higher income to lower-income earners.

In the short-term, this didn't have bad top-line aggregate effects on the economy, but it was a key factor in the bad distributional results since that time.

George H. W. Bush only served a single term.

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