Tax cuts – who should get them? More bang for your buck!

In teaching my A2 students about the multiplier, I came across this useful graphic found in this New York Times article.

The idea of the multiplier is that an initial increase in one of the components of AD will create incomes, generating further spending prompting firms to take on more workers so creating even more spending so the final effect on AD will be larger than the initial increase (depending on the size of the multiplier). Using fiscal policy in a recession a government may provide a welcome boost to a lagging economy but which of its policy options would have the most effective impact?

The graphic shows various multipliers associated with different fiscal policy options the US government has at its disposal. In a downturn, a government would look to cut taxes and/or raise government spending. Keynes argued that government spending is the most effective way to boost growth and create jobs as a dollar spent by the government will lead to a higher return than tax cuts as the consumer is likely to save some of the cut. Looking at the figures below, this theory seems to hold out.