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Phased-In Tax Cuts and Economic Activity

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Author Info

  • Christopher L. House

    (University of Michigan)

  • Matthew D. Shapiro

    (University of Michigan & NBER)

Abstract

Phased-in tax reductions are a common feature of tax legislation. This paper uses a dynamic general equilibrium model to quantify the effects of delaying tax cuts. According to the analysis of the model, the phased-in tax cuts of the 2001 tax law substantially reduced employment, output, and investment during the phase-in period. In contrast, the immediate tax cuts of the 2003 tax law provided significant incentives for immediate production and investment. The paper argues that the rules and accounting procedures used by Congress for formulating tax policy have a significant impact in shaping the details of tax policy and led to the phase-ins, sunsets, and temporary tax changes in both the 2001 and 2003 tax laws.

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File URL: http://128.118.178.162/eps/mac/papers/0404/0404009.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0404009.

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Length: 48 pages
Date of creation: 12 Apr 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0404009

Note: Type of Document - pdf; pages: 48
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Web page: http://128.118.178.162

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Keywords: Fiscal Policy; Tax Policy;

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References

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  19. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
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