Why Tax Cuts Should Be Skewed to the Poor

What’s the point?

     Two Reasons for tax cuts: 

          1) as a means of dispersing a government surplus 

          2) as a means of stimulating the economy.

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     Tax cuts can stimulate the economy by injecting money into the system. The idea is that people who have money in their pockets will more likely spend. Spending money increases the velocity of money generating demand for goods and services. Increased demand means business have opportunities to make profits. And so begins the virtuous business cycle.

What’s Fair

     Strong arguments can be made  to reduce taxes on the rich. The rich by far pay the majority of taxes.  Yet, we see evidence that most of the benefits of tax deductions already go to the rich. The rich also keep a far bigger share of earnings after taxes which allows for wealth accumulation. Odds are good that some of the tax savings for the rich will go in the bank. Banking kills the velocity of money, a nap-time, nothing gets generated while is held in an account.

     Strong argument can be made for tax reduction on the middle class too. They have less total income to meet their needs and wants.  Also, they are economically less secure than the rich. Good reasons to favor a tax cut for the middle class. Yet precisely because of their economic vulnerability, this group will tend to take some of their tax cut and put it towards savings. The threat of losing a job looms largest during economic recessions. Uncertainty is a powerful motivator for of many in the middle class to set aside some of a tax cut as a rainy day fund.

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Illustration by Ron Leishm 

What Works

     The strongest argument rests with the poor, those at or below the living wage. If the purpose of tax cut is to stimulate demand, this is the group to do it because they have the highest marginal utility rates. They are most likely to spend a tax cut immediately because their needs are great and constant. By spending these tax cuts they will have an immediate effect on economic demand, kick starting the virtuous business cycle which makes profits possible.

     They also are the group who benefit the most because having extra money substantially improves their quality of life. This is the group with the greatest potential to spend if they have the means to.