Working Paper: NBER ID: w12103
Authors: Eric M. Leeper; Shuchun Susan Yang
Abstract: Neoclassical growth models predict that reductions in capital or labor tax rates are expansionary when lump-sum transfers are used to balance the government budget. This paper explores the consequences of bond-financed tax reductions that bring forth a range of possible offsetting policies, including future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can be contractionary. The paper also finds that more aggressive responses of offsetting policies to debt engender less debt accumulation and less costly tax cuts.
Keywords: No keywords provided
JEL Codes: E1; H3; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in capital or labor tax rates (H31) | economic growth (O49) |
| tax cuts financed through lump-sum transfers (H23) | economic growth (O49) |
| tax cuts financed through debt (H69) | negative growth effects (F69) |
| more aggressive fiscal responses to debt (E62) | less debt accumulation (G51) |
| less debt accumulation (G51) | more favorable growth outcomes (I15) |
| method of financing tax cuts (H20) | economic impact (F69) |