Keynesian Tax Cuts

Keynesian economics argues that during a recession spending needs to increase to fill a gap created by the decline in aggregate demand and return the economy back to full employment.  Politicians have become good Keynesians in that they know that government spending and running deficits can be used to boost aggregate demand.  However, the theory also argues that you can cut taxes allowing individuals to keep more of their income to spend.  The problem with tax cuts is they have to be greater than the government spending, because of savings.

The issue of late is whether or not to let the tax cuts put in place in 2001 continue or let them return to previous rates.  Many economists note that lowering tax rates increases revenues.  Kennedy famously cut tax rates to address recessionary concerns and deficits (against his Keynesian advisors).  Regan also cut tax rates leading increases in revenue.  However, some economists and pundits are noting that the current tax cuts are so small at the margin that they are unlikely to raise revenue compared to Kennedy lowering the top rate from 91 to 70 percent and Regan lowering it from 70 to 50 percent.

So let's be clear, here what we are really talking about is not providing a tax cut but maintaining the current tax rates if they are extended and a tax increase if they return to 2001 rates.  While Keynesian tax cuts are a rare thing compared to increasing government spending Keynesian theory would not argue for a tax increase during a recession.

David Henderson explains in an article Forbes that former Chair of the Council of Economic Advisors, Christina Romer's research undercuts the policies being advocated by the current administration.  Romer's research and Keynesian theory both suggest tax cuts over tax increases during a recession.  That leaves one wondering what theory or models are the pundits and advisors of the current administration following?