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Evaluation of the Effects of Reduced Personal and Corporate Tax Rates on the Growth Rates of the U.S. Economy

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  • Jacques Kibambe Ngoie

    ()
    (Department of Economics, University of Pretoria)

  • Arnold Zellner

    ()
    (Booth School of Business, University of Chicago)

Abstract

Using several variants of a Marshallian Macroeconomic Model (MMM), see Zellner and Israilevich (2005) and Ngoie and Zellner (2012), this paper investigates how various tax rate reductions may help stimulate the U.S. economy while not adversely affecting aggregate U.S. debt. Variants of our MMM that are shown to fit past data and to perform well in forecasting experiments are employed to evaluate the effects of alternative tax policies. Using quarterly data, our one-sector MMM has been able to predict the 2008 downturn and the 2009Q3 upturn of the U.S. economy. Among other results, this study, using transfer and impulse response functions associated with our MMM, finds that permanent 5 percentage points cut in the personal income and corporate profits tax rates will cause the U.S. real GDP growth rate to rise by 3.0 percentage points with a standard error of 0.6 percentage points. Also, while this policy change leads to positive growth of the government sector, its share of total real GDP is slightly reduced. This is understandable since short run effects of tax cuts include the transfer of tax revenue from the government to the private sector. The private sector is allowed to manage a larger portion of its revenue while government is forced to cut public spending on social programs with little growth enhancing effects. This broadens private economic activities overall. Further, these tax rate policy changes stimulate the growth of the federal tax base considerably which helps to reduce annual budget deficits and the federal debt.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201217.

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Length: 27 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:pre:wpaper:201217

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Keywords: Marshallian Macroeconomic Model; Disaggregation; Transfer Functions; Impulse Response Functions; U.S. Fiscal Policy Analysis;

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  1. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S103-26, October.
  2. Jacques Kibambe Ngoie & Arnold Zellner, 2010. "The Use of a Marshallian Macroeconomic Model for Policy Evaluation: Case of South Africa," Working Papers, Economic Research Southern Africa 179, Economic Research Southern Africa.
  3. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research, National Bank of Belgium 109, National Bank of Belgium.
  4. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  5. Zellner, Arnold & Israilevich, Guillermo, 2005. "Marshallian Macroeconomic Model: A Progress Report," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 9(02), pages 220-243, April.
  6. Tobias, Justin & Zellner, Arnold, 2000. "A Note on Aggregation, Disaggregation and Forecasting Performance," Staff General Research Papers, Iowa State University, Department of Economics 12024, Iowa State University, Department of Economics.
  7. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901, 01-2013.
  8. William Barnett & Evgeniya Aleksandrovna Duzhak, 2008. "Empirical Assessment of Bifurcation Regions within New Keynesian Models," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS, University of Kansas, Department of Economics 200811, University of Kansas, Department of Economics, revised Oct 2008.
  9. Giannone, Domenico & Reichlin, Lucrezia, 2009. "Comments on "Forecasting economic and financial variables with global VARs"," International Journal of Forecasting, Elsevier, Elsevier, vol. 25(4), pages 684-686, October.
  10. Zellner, Arnold & Israilevich, Guillermo, 2005. "The Marshallian macroeconomic model: A progress report," International Journal of Forecasting, Elsevier, Elsevier, vol. 21(4), pages 627-645.
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