Tax Increases Reduce GDP

NBER ^ | Feburary/March 2008

[reaganaut1]

[A]n exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.

These output effects are highly persistent. The behavior of inflation and unemployment suggests that this persistence reflects long-lasting departures of output from its flexible-price level, not large effects of tax changes on the flexible-price level of output. Romer and Romer also find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large.

[reaganaut1]

How big would Clinton or Obama tax increases be relative to GDP?

[foxfield]

Ping!

[Man50D]

Fair Tax ping!

[mountainlyons]

I had a couple of economics teachers that would disagree with these guys. They said the amount was 10% and I would believe them over this article. The economy would have to be almost stopped to have a 1-2% reduction. The average dollar gets spent 10 times a year (multiplier effect) so the effect of tax would be at least 10%. Lying liberals at work again.

[MrB]

You could put these stats in front of libs, and especially lib politicians, and even if they knew they were correct, they’d reject the premise.

It’s not about increasing revenue to the treasury (as happens with every tax CUT), or about doing what’s good for the economy -

it’s about the power and control of being able to punish those who are successful.

[FBD]

bttt^ and bookmark
tx for the ping!

[OrioleFan]

[A]n exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.

So by raising taxes Obama will end up cutting some of the billions he plans to send to Africa and undeveloped countries under the United Nations formula. Remember, he sponsored the bill to tie what we give to undeveloped countries to a percentage of GDP (using UN guidelines). Law of unintended consequences. He'll have to modify the legislation to say the "GDP when I was elected."

[sr4402]

Of course Obama/Clinton's tax increases will have a positive effect on the Economy. Liberals have ordained that it Must be So.

My Problem is the Republicans and MSM is so silent. Don't they know just stating that Sigles will lose $XXXX and marrieds with 2 children will lose $YYYY in increased taxes will wash out Obama's/Hillary's chances like a snowball on a hot sidewalk.

Why are we Republican's keeping so silent??

[expat_panama]

"...an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent."

tax cuts precede increased GDP

Lots of us have been saying this all along.  

The difference here is that NBER uses big words and we prefer to eschew obfuscation --oops, we leave out junk that just makes it hard to see what we mean.  We may be wrong, because for years we've laid it all out as clear as a bell and so many freepers have totally missed the point.  

These freepers come on like somehow they're the only ones who care,  how they're the only ones who're willing to protect future generations from the killer deficit.

--and increased GDP precedes revenue increases

Reality check. 

If we really want less debt then we've got to bring about the revenue increase that only comes with economic growth.  Tax cuts make GDP grow.

Wait, maybe I'm being too clear --exogenous exogenous exogenous exogenous --is the point more convincing now?.

 

[AndyTheBear]

The Democrats have the answer.

Granted raising taxes at this point shrinks the economy, which causes the actual revenue generated by the taxes to shrink.

But the Democrat answer is simple and elegant: they will just raise taxes some more so they can dole out economic relief.

Of coarse, this will cause an even greater short fall in revenue, and an even more economic woes that they need revenue to fix.

The next step is obvious: blame both problems on "the rich" and raise taxes...

How big would Clinton or Obama tax increases be relative to GDP?

What part of the word "progressive" are you not understanding? (see above for illustration).

[Republic of Texas]

Breaking...Sun is the center of the Solar System! This is news?

[adorno]

[A]n exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.

What we have here is a failure to communicate.

Though most of us here might not have too much of a problem in understanding the article and the consequences of higher taxes on the economy, the reality is that most of the people out there would come away with blank stares on their faces after having read that article.

What is needed is for clear and simple language to translate what economists say, and especially, what Fed Chairmen say every time they step in front of a microphone or in front of congress.

If the little people don't understand the simple economics of higher or lower taxes, and free trade, and stock trades, and government control, and supply and demand, then we will forever by fighting the battle of socialism versus capitalism.

If the majority of the people remain ignorant of the value of free markets and capitalism, then they will go with what appeals to them which is the simplicity of larger government taking care of their needs. Socialism is very basic: take away from the rich and well-off, and distribute that wealth amongst the less well-off. Socialism takes away from economies with high taxes and by government control of companies and wealth. It is a simple mechanism which is simple for the simple-minded to understand. What the simple-minded don't understand is that government control and higher taxes always leads to lower standards of living, poverty and less freedoms.

What is needed is a book that makes "Economics, Taxes, Wealth, Free-Market Systems, Capitalism, and Government Control Made Simple".

[reaganaut1]

“What is needed is a book that makes “Economics, Taxes, Wealth, Free-Market Systems, Capitalism, and Government Control Made Simple”.”

Yes, but Thomas Sowell has been writing columns and books on such themes for years, and where has it gotten us?

[remember]

"...an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent."

Lots of us have been saying this all along.

The difference here is that NBER uses big words and we prefer to eschew obfuscation --oops, we leave out junk that just makes it hard to see what we mean. We may be wrong, because for years we've laid it all out as clear as a bell and so many freepers have totally missed the point.

These freepers come on like somehow they're the only ones who care, how they're the only ones who're willing to protect future generations from the killer deficit.

Reality check.

If we really want less debt then we've got to bring about the revenue increase that only comes with economic growth. Tax cuts make GDP grow.

Wait, maybe I'm being too clear --exogenous exogenous exogenous exogenous --is the point more convincing now?.

More colorful, yes. More convincing, no. I haven't had the time to read the paper on which this thread is based, just to skim it. However, I get the impression that you have not read it either. Otherwise, you would have likely noticed some of its comments about deficit-driven tax changes such as the following excerpt on page 40:

Responses to Deficit-Driven Tax Changes. In Section IV, we found that the response of GDP to a deficit-driven tax increase is positive, though not significant. Since the literature has suggested that deficit-reducing fiscal reforms may have such positive effects, we look at the response of the components of GDP to deficit-driven tax changes.

In addition, following is an excerpt from the conclusions on page 43:

Finally, we find suggestive evidence that tax increases to reduce an inherited budget deficit do not have the large output costs associated with other exogenous tax increases. This is consistent with the idea that deficit-driven tax increases may have important expansionary effects through expectations and long-term interest rates, or through confidence.

Even if you only looked at the pictures, you would have seen the following chart from figure 6 on page 62:

Hence, tax increases to "protect future generations from the killer deficit", as you put it, appear to have a slightly positive effect on the GDP according to this paper. As I said, I haven't had time to do more than skim the paper so I cannot offer comments on its specifics. Still, it helps to at least read enough of the paper to know what it is claiming.

Anyhow, I'm sure you'll be happy to hear that I've updated my analysis of the Reagan and Kennedy tax cuts to include the Bush tax cuts. Following is a graph from it:

As you can see, the 10-year growth in GDP has been pretty stable since the 1975-1985 period. The updated analysis is at http://home.att.net/~rdavis2/taxcuts.html. Feel free to let me know if there are any specific numbers or conclusions that you disagree with.