• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • New Study Shows Tax Cuts Most Effective Stimulus

    The failure of the stimulus package to create jobs and generate economic growth becomes more apparent each day – despite preposterous claims from the White House about all the jobs they say it has created and saved. Counter intuitively (at least in the sane world outside of Washington), the stimulus’ failure increases the risk that Congress will try to pass another stimulus package based on their perceived need to “do something” to help the still-ailing economy.

    If Congress constructs the next stimulus the same way it did the last – jam packed with pork barrel spending projects favored by liberals – it will fail as miserably as the first did to create jobs and stir economic activity. That is because government spending cannot create economic growth. More government spending, whether financed by taxes or borrowing, only takes money from one sector of the economy and transfers it to another. The government creates no new spending power when it redistributes money so it creates no new economic growth.

    As the Heritage Foundation has pointed out, a stimulus package that lowered marginal tax rates instead of spending massive amounts of future generation’s wealth would actually create jobs and help pull the economy out of the Great Recession. That is because lower marginal tax rates would increase the incentives of people and businesses to work, save and invest – the very ingredients needed to create economic activity.

    These findings are backed up by a new study, “Large Changes in Fiscal Policy Taxes Versus Spending,” authored by Alberto F. Alesina and Silvia Ardagna – both Harvard economists. Alesina and Ardagna find that:

    …tax cuts are more expansionary than spending increases in the cases of fiscal stimulus. Based on these correlations…the current stimulus package in the US is too much tilted in the direction of spending rather than tax cuts.

    In addition to their findings that tax cuts are better at promoting economic growth, Alesina and Ardagna found that spending-based stimuli are actually associated with lower economic growth rates.

    To reach their conclusion, the researchers studied major changes in fiscal policy in 21 countries in the Organization for Economic Cooperation and Development (OECD) – a group of the most economically developed countries in the world – between 1970 and 2007. They compared stimulus packages that occurred in these countries during that time frame based on spending increases to those based on tax cuts. They then measured the resulting impact on economic growth after the different types of stimuli took place. That way they could determine which type of stimulus had a bigger impact.

    The real-world and academic evidence is clear that government spending-based fiscal stimulus does not work. Congress should heed the findings of this important new study, and the proof right before its eyes, that spending more money does nothing to help the economy. It should come to this realization before it embarks on another stimulus package predicated on more spending instead of marginal tax rate cuts.

    If it is serious about helping the economy and creating jobs for those out of work, Congress should put aside its ideological predisposition to spending and lower marginal tax rates to get the economy moving again and put unemployed Americans back to work.

    Posted in Economics [slideshow_deploy]

    26 Responses to New Study Shows Tax Cuts Most Effective Stimulus

    1. Normca says:

      These people; the democrats hated GW Bush. They hated Ronald Reagan. They would never admit that what both did, exploded into growth. The Reagan tax cuts allowed Clinton to have a great economy during those years [despite what he did]. The proof that they know it does not work is that for a union construction contractor to get a job, the company must put on paper that all of his former employees [those employees on the books for years] are all new. And for every contract, no matter the dollar amount, each employee is counted by the number of contracts. If two concrete slabs are poured by 5 employees with two contracts that is 10 new employees. That is how this bunch got their jobs created number. The Obama team are liars – like the 11-3 election, elect a majority of Republicans in 2010 in both houses so that this nonsense can at least be curtailed. Gee the economic team meeting of last week in the white house cabinet room produced what ???

    2. Freedom of Speech TX says:


      Wonder if the President's economic advisors ever heard of this? Yep. They have.

      Then why are they doing the total opposite?

      SANE MODEL: Less taxes = more disposable income = increased consumer spending = stimulated economy = more jobs . . . . . .

      INSANE MODEL (liberal model): more taxes = less disposable income = decreased consumer spending = loss of jobs and closed small businesses who provide MOST of the jobs = increasing unemployment = BIGGER GOVT = consumer dependence on BIGGER GOVT = Socialist/Marxist State = POWER.

      Any doubters? Then what would you call this if NOT socialist/Marxist?

    3. Bill Pless, Jasper, says:

      When money is removed from an economic pool as taxes, there is that much less that can be spent, saved or invested. The govt only takes money from one group who has produced it and gives it to another group who consumes it. Government itself doesn't produce anything, but burdens the economy by taking from the producers. The only instances in which the government produces is in the defense and space industries, where it becomes a producer by proxy, creating tens of thousands of jobs which result in goods and services vital to this nation. Much of this is fed back into the general economy to advance technology and improve life in general. But these are the areas that liberals constantly try to limit or ignore, as if they are unnecessary evils.

    4. Nicolai Alatzas says:

      Freedom of Speech Texas-

      Although we differ a lot on policy. I can't agree with you more on this one.

      I believe the best approach for the people should be that we challenge the legality of wage taxes. Or what the government calls income tax.

      What happened to "No Taxation without Representation".

      Wouldn't it be a lot simpler to just tax goods in this country? Instead of varying levels of income tax? Give the people all of their earned wages and watch the economy explode.

      Flat tax Goods- And portion the tax to government programs that "We the People" actually want.

    5. Nicolai Alatzas says:


      I will agree Reagon promoted a lot of growth in this country. But are you kidding me about Bush?

      Name one sector Bush promoted growth in and tell me how much the dollar inflated over his administration.

      Bush left us in turmoil- His Crony style Government and No Bid Contract for War Profiteers are criminal. He should be sent to a labor camp to pay his debt to society.

    6. Tommy..........Alaba says:

      who does nicolai think she is talking about…..i earned (worked for )and saved more money when Mr.Reagan and Mr. Bush ( 2 )that i did and it wasn't because of the men they follewed into the Office

    7. Grace, Florida says:

      This administration does not want the country to get out of the economic turmoil we are in. It's so obvious that they are focusing on everthing but the issues that need to be addressed. Jobs, Jobs and Jobs. People are not going to spend money until they have more trust in this government. Unemployment is rising and we are having a debate about healthcare. If we keep loosing jobs we won't have to worry about healthcare – we'll have to be on the government programs because that's all there will be. Wake up everyone – see what this evil man is doing.

    8. Boyce Robbins Easley says:

      ehe true wealth of any nation is the ability of its people to produce products and provide services. These functions are best facilitated by private enterprises which must function efficiently to survive in competitive environments. Take away competition and there is no incentive to bestir yourself, try new ideas or check on the efficacy of old ones. In any bureaucracy the focus is on maintaining the status quo since any unsuccessful act will result in consequences for the initiator while doing the same old things will lead to continuance and probably good evaluations and promotions-being a "team player," etc. When the government fails they say the problem was lack of money or regulations and pass new legislation calling for more. When a private enterprise fails, they must learn or die. These truisms escape liberals.

    9. Ben C, Ann Arbor says:

      Well said Boyce Robbins Easley. The operative word is incentive. Without it society stagnates and we regress to indirect slavery (the "government" will be our master). Fortunately I will be gone when this occurs but my daughter will be alive and I will not have this as my legacy – at least not whitout a fight.

    10. Freedom of Speech TX says:


      Your solution would be better than what we have. Most Americans would agree with this.

      The reason WHY people are so angry is because government has turned into King George III of England on steroids. Anyone can come up with a good idea to help constituents. But, everytime you "help" somebody, someone else gets hurt. The solution is always to tax for more. This is out of control and BS. I know MOST Americans would agree with THAT.

      The reason politicians have not accepted your idea is because it would dilute their power. The Tax Code is a great way to divy out favors or punishments to lobbyists and/or perceived enemies.

      A federal flat tx of 10% on everything. A state flat tax oof 15% on everything. That's it. Government can "grow" smaller and leave us alone.

      If people kept more of their money you'd be surprised how much more they would give to charity than the estimated $500 billion annually.

      I'm pretty sure that number will decrease this year.

      Got to love that tax, borrow, and spend. It helps everybody, right?

    11. Freedom of Speech TX says:

      HUGE TYPO!!!!!


      Dear Lord what am I doing to myself with 15% vice 5%!

    12. Leon, California says:

      The links in the article do not work for me. I would like to read the report. Can you provide a link?


    13. Margaret Horvath, Ri says:

      At first I thought the President's lack of experience was at fault. Now, I truly think this is all done on purpose. The goal is to destroy the Dollar, bring this country down to a size he and his advisers think we deserve, create a governing class, and the rest of us dependent on him. Why else would anyone in his right mind do what is being done. We must find a way very soon to meet this challenge and turn it around. Please, keep the truth coming our way. God Bless America!

    14. Susan, Detroit says:

      The Dems do know that cutting taxes and government spending whould improve the economy. They want to destroy America.

    15. Pingback: Harvard economists explain how Obama’s spending created 10.2% unemployment « Wintery Knight

    16. Nicolai Alatzas says:


      I hope you made more on interest an investments than the dollar lost over the past 10 years. Inflation was phenomenal and had you traded in your dollars for Euro's you would probably be rich.

    17. Lynn B. DeSpain says:

      Well duh!

    18. Pingback: Latte Links (11/6) | Caffeinated Thoughts

    19. Leon, Durango, CO says:

      Plutocrats are serving their own interests, and House Democrats voting for Communist Health Care have shown their true colors. All of it is illegal if we can get the Supreme Court to Rule.

      How about Impeachment? Shove it down their throats so the Supremes will have to Rule. I apologize for the repetition but HOW DOES THIS SOUND?


      ARTICLE 1 : Acts of Treason, against the Constitution, False Swearing a Senate Oath, and Conspiracy to serve a Foreign Interest in Congress.

      ARTICLE 2 : Acts of Treason, against the Constitution, Fixing Elections, Buying Elections, Creating Organizations for the purpose of Election Fraud (ACORN), Fixing Elections by Intimidation, unlawful attacks on opponents of election, fixing the electoral process while infiltrating the United States Government in the Interest of Foreign Powers.

      ARTICLE 3 : Abuse Of Power, against the Constitution, the establishment of Foreign Interest mandated but unlawful and not republican and representative government styles: of Communism, Socialism, Humanism (Czars), in abrogation of lawful Constitutional mandated government. Creating abusive and Unconstitutional Laws, crafting criminality into Law.

      ARTICLE 4 : Conspiracy, against the Constitution and the People of the United States, unlawful infiltration, cause of unlawful Communism to arise, Nationalization of means, unlawful Socialism and totalitarian government, and fulfill the Plans Of A Foreign Interest.

      ARTICLE 5 : Conspiracy, Racketeering, Influence and corruption, unlawful payments, unlawful favors, vote buying; Conspiracy to change America by intimidation, coercion, usurping, re-writing Laws, Texts, Curriculum, against the Constitution in conspiracy and collusion with Foreign Interests, Long Standing Enmity against the Constitution. False Oath Taking.

      ARTICLE 6 : Treason, infiltrating and operating in public office, including President, against the Constitution, against the Interest of the People and in the Interest Of Foreign Powers of long standing enmity.

      Pardon me, Freedom of Speach, TX but this might be a quicker solution. Stop the Communists before they finish Joe Stalin's Plan For America.

    20. Nicolai Alatzas says:

      Seriously Leon~ Communists? Does that make the People Republic Of China ~ Republicans?

    21. ELC says:

      All the links in the body of this article are improperly formatted.

      Here is the correct link to the study:


    22. Pingback: Jobs Summit Farce | Be John Galt

    23. Pingback: The Nobama Blog » Blog Archive » 12 Things Obama and Congress Can do to Create Jobs

    24. TexasChick, Houston, says:

      Communism (per Webster).."a theory advocating elimination of private property, a system in which goods are owned in common and are available to all as needed, totalitarian system of govt. in which a single authoritarian party controls state owned means of production with the professed aim of establishing a stateless society, a final stage of society in Marzist theory in which the state has withered away and economic goods are distributed equitably…."

      Me thinks Leon in Colorado is correct! Why are we not pursuing the impeachment he so eloquently delineates?

    25. Pingback: Did George W. Bush’s tax cuts help or hurt the economy? « Wintery Knight

    26. TZ,Illinois says:

      For my state it's hopeless. The candidates the Republicans are running here are

      a joke-it's really a shame and a lost opportunity for true reform on behalf of the tax payers of Illinois. It really makes you wonder if "politics" doesn't self select arrogant, self serving scum bags and socialists to begin with-is every political system or government doomed to eventual failure as a result of unavoidable human fallability? This alone is a strong argument for limited government of both size and power. Check out all the disgusting scum bags trying to run for mayor of Chicago-what a swamp of scum that city will become…. but I digress..

      We are all pretty much preaching to the choir-we know what the problem is-

      just be sure to vote.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.