A More Effective Stimulus

Corporate tax cuts as well as multiple rounds of quantitative easing, while popular tools for stimulating the economy, have no effect on the profit maximizing condition, marginal revenue (MR) = marginal cost (MC), and could prove ineffectual as firms use the tax cuts, not to increase output, but to cover existing fixed costs or to save until after a recession to begin expansion. Although reductions in income taxes do affect the consumer optimality condition by reducing the shadow price of wealth, uncertainty of the future might force consumers to save rather than consume. We propose that short duration (1 month) sales tax cuts (STCs) (or even price subsidies) would be a more effective policy tool than blanket income and corporate tax cuts as they target both producer and consumer equilibrium conditions by reducing price, increasing MR, and lowering MC. STCs have the added benefit of being class neutral and also ultra efficient as agents benefit from the tax iff (if and only if) a purchase takes place. Coupled with a post recovery blanket increase in income and corporate taxes to neutralize the loss in revenue, STCs would create a Nash equilibrium forcing economic activity as those agents who do not take advantage of the STC would finance those who do. Furthermore, policymakers can tailor STCs to surgically target specific sectors of the economy