Will Tax Cuts Worsen the Recession?

That's the argument of Wade's Krugman post yesterday.

The argument, which comes from a paper by Gauti Eggertsson goes like this: cutting taxes on labor or capital can have contractionary effects on the economy under a special set of circumstances, like when the interest rate is at zero, like it is today. Part of the reason is that at a zero interest rate, production is not the problem. Demand and spending are, which is why cutting capital taxes won't work. We don't need more shovels or tools, we need more people who want to buy the products those tools create. Tax cuts will only reinforce the "paradox of thrift." i.e. people will just save their money, which will cause further contraction.

However, the paper suggests that sales tax breaks may be expansionary because they will cause consumers to spend more. One problem with this, from a policy perspective, is that sales taxes are controlled at the local level. Unlike the federal government, most local governments can't run deficits. So, it's unlikely that they will be able to afford a sales tax holiday of any kind.