If you gave each member of Congress $1B to go to their local casino and put it all on a single hand of blackjack, that would stimulate the economy. The problem with that approach is that we likely would not see much of an impact beyond the initial spend—it would be close to pure consumption. Similarly, we could give a 10% tax cut to every person in the country, but if all anyone is going to do is save that money, it will be completely wasted.
All spending is not equal. When you spend money building a new transportation that enables workers from an area with excess capacity to an area requiring labor, you do a lot more for the economy than if you were to spend that money studying cow farts. When you drive tax cuts to small businesses who tend to re-invest excess cash as opposed to big companies who tend to pocket that cash, you do a lot more for the economy.
When comparing a tax cut versus a spending increase, you need to look at the big picture impact of the tax cut versus the spending increase.
The best way to judge the impact of spending is on the macro-economic impact. Is the thing being spent on something that has limited or negative ROI for an individual business yet has a significant impact across society? Any program fitting this description is a good program for government to spend money on (and thus tax the populace OR borrow money).
The best way to judge the impact of a tax cut is to understand what the beneficiaries of a tax cut are likely to do with the money. If the tax cut is likely to go directly into investment vehicles, it's a good candidate for a targeted tax cut. To pay for a tax cut, you either need to cut spending OR borrow money.
The worst time to increase taxes or cut spending is during an economic downturn. During a recovery period, cutting taxes tends to be most effective in fueling a recovery because the recipients tend to be most interested in investing their windfalls. On the other hand, spending is much more effective in the middle of a pronounced downturn since individuals and businesses are shy about investing any excess cash during a downturn.
In fact, the current economic crisis is a perfect example of why tax cuts don't help as much during an economic downturn. There is plenty of capital to loan and invest in the market, but no one is doing it. There is too much fear and it is impacting investment. If we give a 10% tax cut right now to anyone, they will almost certainly pocket that savings. If, on the other hand, we spend $500M on a roads project, that will create a demand for capital from construction which will free up investment from banks and inject money into businesses serving the project and create jobs. That will in turn create confidence in the market and make it possible for capital to flow more freely.
For the long-term, hopefully the roads project is on a road we actually need and that will fuel long-term economic growth. Even if it is on a "Bridge to Nowhere", however, it will create a short-term stimulus that can hopefully create enough market confidence to free up capital and enable the free market to do its job.
The impact on the current debate on the stimulus plan is simply this: under the current circumstances, all else being equal, $1 in government spending will have a greater short-term economic impact than $1 in tax cuts. If spent on the right things, those spending increases should also have a greater long-term economic impact. Furthermore, the best place to cut taxes right now is on small and medium-sized businesses who are likely to re-invest whatever the economic circumstances. The closest thing we have to this mix is the Senate bill. It's not perfect. It has a lot of "sending Congressmen to the casino" crap in it, but it also has a lot of critical infrastructure spending in it. Under the current circumstances, almost anything is better than nothing.
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