Working Paper: NBER ID: w10430
Authors: Martin Eichenbaum; Jonas Fisher
Abstract: This paper investigates the nature of U.S. fiscal policy in the aftermath of 9/11. We argue that the recent dramatic fall in the government surplus and the large fall in tax rates cannot be accounted for by either the state of the U.S. economy as of 9/11 or as the typical response of fiscal policy to a large exogenous rise in military expenditures. Our evidence suggests that, had tax rates responded in the way they `normally' do to large exogenous changes in government spending, aggregate output would have been lower and the surplus would not have changed by much. The unusually large fall in tax rates had an expansionary impact on output and was the primary force underlying the large decline in the surplus. Our results do not bear directly on the question of whether the decline in tax rates and the decline in the surplus after 9/11 were desirable or not.
Keywords: No keywords provided
JEL Codes: E1; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unusually large tax cuts (H29) | substantial decline in the surplus (H62) |
| tax rates (H29) | surplus (H62) |
| alternative tax policies (H29) | aggregate output (E10) |
| alternative tax policies (H29) | surplus to GDP ratio (E20) |
| military spending (H56) | tax rates (H29) |
| military spending (H56) | surplus (H62) |