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- Title
ARE TAX CUTS STIMULATORY?
- Authors
Arak, Marcelle
- Abstract
Since World War II, most economists have argued that tax cuts are an effective means of stimulating aggregate output at times of economic slack. The original explanation was that the consumer spent in relation to disposable income. Since a tax cut, financed by bond issuance, would increase disposable income, it would raise consumer spending. The increase in total demand would then cause an expansion in output. In recent years, this view has been challenged by economists who argue that households anticipate future taxes implied by the deficit. Indeed the empirical work of economists J. Ernest Tanner and L.D. Taylor suggested that deficits were virtually identical to current taxes in their effect on consumers. More recent studies by economists Levis Kochin and Tanner, which explicitly focused on the effect of deficits on consumption, found that each dollar of deficit was the equivalent of about 33% of current taxes. During a period of price stability, the effect of deficits on consumption can be tested by including the deficit, as conventionally measured, in a consumption function which also contains disposable income, in a period of price rise, however, this is not the correct test. New tests presented below indicate that deficits, properly defined, do not have a significant negative effect on consumption.
- Subjects
DEPRESSIONS (Economics); TAX deductions; PERMANENT income theory; TAX cuts; ECONOMICS; INCOME; CONSUMPTION (Economics); CONSUMER behavior; PRICES; ECONOMIC demand
- Publication
Review of Economics & Statistics, 1982, Vol 64, Issue 1, p168
- ISSN
0034-6535
- Publication type
Article
- DOI
10.2307/1937960