The Romers of Berkeley, on fiscal policy

by on July 16, 2007 at 1:53 pm in Economics | Permalink

…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 increases on investment.  We
also find that legislated tax increases designed to reduce a persistent
budget deficit appear to have much smaller output costs than other tax
increases.

Their work is of the very highest quality, and not to be confused with many of the more dubious claims made about taxation and investment.  In particular they make a point of isolating exogenous changes in the tax code.  Here is the paper.  Here is a non-gated version.

William Newman July 16, 2007 at 3:33 pm

I am sympathetic to the conclusion — it’s in the direction that I’d expect — but I am quite skeptical that the conclusion can be reliably extracted from only 60 years of data on a few gross averages for a single political entity which was also subject to various other economic shocks in the period.

Even for time series where in principle all the correlations are knowable (e.g., the progress of a Metropolis Monte Carlo simulation) it can be very difficult to quantify how many independent samples worth of data one has. For economics at our current level of knowledge, it seems hopeless to try to quantify how many independent samples worth of data are in those 60 years. But intuitively it seems to me as though it’s a rather small number, small enough that picking out the effect of one causal variable among several comparably important causal variables is unlikely to give a correct answer except by luck.

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