Why Tax Cuts Do Not Boost Spending

Consumers often treat tax cuts as a future bill rather than extra cash. Because they anticipate higher taxes later to pay off public debt, many people save the money instead of spending it.

This concept suggests that government borrowing is essentially a deferred tax. Rational individuals realize that a current deficit must eventually be balanced by higher taxes on themselves or their children. As a result, they stash the savings away to cover those future costs, neutralizing the intended stimulus. This theory provides a fascinating challenge to the idea that government spending alone can easily shift a nation's economic fortunes.