Automatic stabilizer

Abstract: During World War II and the Korean War, real GDP grew by about half the increase in government purchases. With allowance for other factors holding back GDP growth during those wars, the multiplier linking government purchases to GDP may be in the range of 0.7 to 1.0, a range generally supported by research based on vector autoregressions that control for other determinants, but higher values are not ruled out. New Keynesian macroeconomic models yield multipliers in that range as well. Neoclassical models produce much lower multipliers, because they predict that consumption falls when government purchases rise. Models that deliver higher multipliers feature a decline in the markup ratio of price over cost when output rises, and an elastic response of employment to increased demand. These characteristics are complementary to another Keynesian feature, the linkage of consumption to current income. The GDP multiplier is higher—perhaps around 1.7—when the nominal interest rate is at its lower bound of zero.

Abstract: Several interesting papers have recently considered whether government taxes Granger cause government spending or vice versa. The findings, based on standard Granger [6] causality tests, are not consistent. Manage and Marlow [10] conclude that when evidence of one-way causality exists, federal taxes Granger cause federal spending, while Anderson, Wallace, and Warner [1] conclude that the evidence supports one-way causality in the opposite direction. Ram [11], reexamining the issue, concludes that taxes Granger cause spending at the federal level, but that spending Granger causes taxes at the state and local level. Von Furstenberg, Green, and Jeong [13], in another related article, examine the tax and spend, spend and tax causality issue using a more general vector autoregressive (VAR) model. They introduce, in addition to federal taxes and spending, two economic variables-the GNP gap and the inflation rate, decompose federal spending into several categories, and remove the effects of automatic stabilizers when appropriate. They find little evidence that taxes Granger cause spending, and limited evidence that spending causes taxes-a finding which corresponds most closely to that of Anderson, Wallace, and Warner [1]. Our purpose is to reconsider the causality issue with the aid of co-integration and errorcorrection modeling. Our analysis illustrates with a specific example how sources of causality can be neglected in standard Granger causality tests. Moreover, addressing the question of temporal causality between government taxes and spending provides insight as to how different policies might, or might not, help control the growth of government. The results of our estimating various co-integration and error-correction models with quarterly data suggest bi-directional causality between government taxes and spending, both for the federal, and state and local sectors. This finding counters the conclusions of previous studies. When annual data are used, however, our

Abstract: We provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare and show that tax system or spending program which is suboptimal from a Ramsey point of view can improve taxpayer welfare because the system creates additional political pressure for suppressing the growth of government. Relevant examples include the use of inflation taxes capital taxes, excise taxes, deficit financing, and income taxes with many We also demonstrate the similarity of the political responses to revenue shocks, spending shocks, changes in program efficiency. In a broad sample of countries for the years 1973 - 90, we show that broad-based taxes with fairly flat rate structures -- are associated with larger governments. An analysis of defense spending -- especially wartime spending -- oil shocks, intergovernmental grants, and other flypaper effects suggests that the cause and effect is not from spending to tax structures.

Abstract: Using the TAXSIM model for the period 1962-95, we consider the federal tax system's impact as an automatic stabilizer. Despite the many changes in the tax system, there has been relatively little change in its role as an automatic stabilizer. We estimate that individual federal taxes offset perhaps as much as 8 percent of initial shocks to GDP. We also suggest that the progressive income tax may help to stabilize output via its effect on the supply of labor, an additional effect that may even be of similar magnitude to the more traditional path of stabilization through aggregate demand.