The Limitations Of Keynesian Arguments For Tax Cuts

Martin Feldstein tries to justify extending the Bush tax cuts (which are set to expire in 2011) by another 2 years, using the Keynesian argument that the recovery is too weak for the government to reduce purchasing power through higher taxes.

But as Mark Thoma points out, one could just as well implement temporary increases in government spending of the same amount as the tax cuts, while letting the tax cuts expire. So Keynesian analysis is not (at least not by itself) enough to justify tax cuts as opposed to spending increases.

The real economic argument for the tax cuts instead consists in that they (unlike spending increases) improve incentives and thus improves structural growth. But accepting that would of course create a case for making the tax cuts permanent, and not extend them for merely 2 years like Feldstein advocates.