Working Paper: NBER ID: w7662
Authors: Alan J. Auerbach; Daniel Feenberg
Abstract: Using the TAXSIM model for the period 1962-95, we consider the federal tax system's impact as an automatic stabilizer. Despite the many changes in the tax system, there has been relatively little change in its role as an automatic stabilizer. We estimate that individual federal taxes offset perhaps as much as 8 percent of initial shocks to GDP. We also suggest that the progressive income tax may help to stabilize output via its effect on the supply of labor, an additional effect that may even be of similar magnitude to the more traditional path of stabilization through aggregate demand.
Keywords: automatic stabilizers; federal taxes; GDP fluctuations; progressive income tax
JEL Codes: E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| federal taxes (H29) | GDP (E20) |
| progressive income tax (H29) | output stabilization (E63) |
| disposable income (D10) | consumption (E21) |
| federal taxes (H29) | aggregate demand stabilization (E63) |
| changes in marginal tax rates (H31) | stabilization effect (E63) |
| income distribution (D31) | effectiveness of automatic stabilizers (E63) |
| federal taxes (H29) | mitigation of economic fluctuations (E39) |