$700 Billion Bailout vs. $700 Billion Tax Cut

[Drewbot]

The recent $700,000,000,000 rescue package, which was passed by the legistlature recently, promises to free up the credit market and solve our economic crisis.

My question is: Would the $700,000,000,000.00 be more efficiently used by the taxpaying public, than by the Federal Government?

In other words, if a $700,000,000,000 tax cut were implemented instead of this rescue package, would our economy have recovered sooner and with greater assurance of results?

If there are 100,000,000 taxpayers, this would average out to 7000.00 per taxpayer.

My opinion is that there is no quicker way to stimulate an economy than a tax cut. This tax cut would instantly create movement of money, it would decrease the amount of debt in the general populace, freeing up credit markets, thus, solving the problems the rescue package is supposed to solve.
While we would have $700B shortfall in tax revenue, the hope is that the $700B increase in consumer spending would create the economic conditions necessary for job creation and an increase in tax revenue which follows.

The rescue package takes 700,000,000,000 from consumers, and loans it to lenders who offer the bad mortgages as collateral. So not only are we taking 700,000,000,000 in credit, but we are not giving the $700B to the consumer. It seems like a double whammy.

[Francesca R]

The recent $700,000,000,000 rescue package, which was passed by the legistlature recently, promises to free up the credit market and solve our economic crisis.I don't think it makes that bold a promise, but it was sold on the basis that its absence would be worse for the (main street) economy in the short and medium term.

My question is: Would the $700,000,000,000.00 be more efficiently used by the taxpaying public, than by the Federal Government?If it was a tax cut, the government (thus the future taxpayer) gets no return from it beyond potentially higher tax revenues from future value-adding production that it might stimulate. Used to invest with (in "troubled" assets and institutions) the government retains title to the capital and has the prospect of a future gain on it on top of its eventual full payback.

In other words, if a $700,000,000,000 tax cut were implemented instead of this rescue package, would our economy have recovered sooner and with greater assurance of results?Some would believe this yes. It would, after all, be a very large cut. However "Ricardian equivalence" would argue that--at least to some extent--much of such a large one-off tax cut could be saved instead of spent, thereby blunting its immediate impact on consumption and production. And also, the immediate situation of massive unwillingness to lend and inability to borrow--in financial and non-financial institutions--would not be solved by an income tax cut for consumers and would have continued to propagate largely unchecked with (feared) calamitous results.

By the way, the intuitive assumption that huge income tax cuts would have been far more popular with electorates--not just in the US but in the UK, France, Germany, and every other country that instead opted for a recapitalisation/bailout plan--lends weight to the claim that this was not done this way for political expediency but because of a genuine belief that this was the best way to deal with the financial and economic crisis.

My opinion is that there is no quicker way to stimulate an economy than a tax cut. This tax cut would instantly create movement of money, it would decrease the amount of debt in the general populace, freeing up credit markets, thus, solving the problems the rescue package is supposed to solve.It would free up consumer debt, but the credit markets are not stuck because of that. Hence for credit markets specifically, a tax cut is more indirect and less targeted. You are correct that income tax cuts are approximately the fastest way to generate higher economic growth (than otherwise)

While we would have $700B shortfall in tax revenue, the hope is that the $700B increase in consumer spending would create the economic conditions necessary for job creation and an increase in tax revenue which follows.Yes that would be the desired mechanism

The rescue package takes 700,000,000,000 from consumers, and loans it to lenders who offer the bad mortgages as collateral. So not only are we taking 700,000,000,000 in credit, but we are not giving the $700B to the consumer. It seems like a double whammy.It doesn't "take it from consumers"--that would be the case if it was funded by a tax increase rather than the issuance of debt. You are, however, correct to some extent in that the same Ricardian principle (actually subsequently largely abandoned by Ricardo himself) would hold that--all else being equal--consumers would respond to an increase in a fiscal deficit by cutting back their own spending in anticipation of (distant) future tax increases to pay for that.

PS--the funds are not being used to make loans to lenders, but (in part) to buy the distressed assets from them. (Part of it is also now being used to take preference equity stakes in the firms themselves)

It is widely believed that there will be further fiscal spending/tax cuts in the US--on top of this plan--under the next administration. Not of the same size, but perhaps a further USD200 billion.

[mhaze]

Making sales tax payments deductible on the Federal tax return (again) would be one way to increase consumer spending, albeit only after the next set of returns are filed. Also a 5 year repeal of the federal 18 cent per gallon gasoline tax would have an immediate effect.

[MIKILLINI]

The bailout money hasn't even been applied yet, Bernanke is still setting on it.
Nobody is willing to step forward and decide what is the right way to use the money because none of them are sure about what the right way is.