Taxes Matter X: “Tax Increases are Highly Contractionary”


In a new paper by economist David Romer and Christina Romer, both professors at the University of California, Berkeley, find that “tax increases are highly contractionary.” The paper, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” was just published by the National Bureau of Economic Research and is available here. However, you need a subscription to view it, though an earlier version is available free here.
The paper succinctly states that: “The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increase on investment.”
Thanks to Dr. Tyler Cowen’s blog “Marginal Revolution” for the source–he is a professor at George Mason University. Here is what he has to say about the paper.
These results also supports the topic of another blog–the deadweight loss of taxation. Put simply, a one dollar increase in taxes may result in up to two dollars in lost economic output.