TD Bank economist Craig Alexander points to the about $100-billion in stimulus cheques sent to Americans by the Bush administration and Congress last spring as a case study of what can go awry with the wrong kind of tax cuts.

"Yes it boosted growth in the second quarter (of 2008), but for every dollar provided, 80 cents were saved, 20 cents went into spending and 10 cents of that went into imports. So probably only about 10 cents of every dollar Americans received went into stimulus," he said.

Still, others say a better-designed economic package based on tax cuts could be beneficial.

Dale Orr of IHS-Global Insight consulting firm says a one-year holiday in the five-per-cent GST on big ticket items such as cars and appliances could induce consumers to move forward their major purchases when the economy can most benefit.

And Douglas Porter of BMO Capital Markets has suggested spending vouchers - direct government money to Canadians on the condition they spend it by a specified time.

Both economists acknowledge the leakage, but even if the plasma TV is imported from Japan, South Korea or China, the sale will benefit Canadian retailers, wholesalers and shippers.

"Leakage is going to be a problem with any stimulus in Canada because we're such an open economy," Porter said. "In terms of trying to stimulate the economy quickly, it's probably the case that tax cuts are not the most effective way to go, but they are not ineffective either."

Part of the reason Flaherty may have to go to tax cuts, say economists, is that he is unlikely to be able to efficiently spend all the stimulus the economy needs - anywhere from $15 billion to $30 billion is anticipated - on infrastructure. That's because spending on roads and other projects generally takes months or even years to get started because it involves various levels of government.

Alexander believes a good rule of thumb for Flaherty is not to do something short-term that won't help the economy long-term.

So infrastructure is good, but only shovel-ready projects that are needed, he explained.

And tax cuts that can be defended as sound economic policy years down the road. He especially favours reducing the high marginal tax on low-income Canadians as they move from welfare to work - or from a low-paying job to a moderately better-paying one - because doing so encourages work and productivity.

A service of YellowBrix, Inc.