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Taxes, Saving, and Macroeconomics

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  • Neil H. Buchanan

    (The Jerome Levy Economics Institute)

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    Abstract

    In response to increasing calls for policies to raise the U.S. saving rate, proposals are once again being offered in Congress to change the tax base from income to consumption. Beyond the important issues of income distribution (that is, outright unfairness) inherent in such a plan, it would simply not work. Indeed, it is based on a fundamental mismeasurement of what counts as saving in the U.S. economy. The logical sequence underlying this proposal is wrong at two crucial points: lowering or eliminating taxes on saving in unlikely to increase saving; and higher saving would be unlikely to increase investment in any case (and would, more likely, decrease investment). The usual crowding-out logic is based on limited evidence and inadequate theory. Finally, the interaction between monetary and fiscal policy is currently perverse. Contractionary fiscal policy (which is what is implied by these proposals) will not be counter-balanced by timely and adequate monetary stimulus. The Federal Reserve is likely to wait too long to respond, either due to excessive caution about the effectiveness of the fiscal policy change, or to take advantage of an opportunity to lower inflation still further before allowing the economy to recover.

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    File URL: http://128.118.178.162/eps/mac/papers/9805/9805009.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 9805009.

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    Length: 34 pages
    Date of creation: 28 May 1998
    Date of revision:
    Handle: RePEc:wpa:wuwpma:9805009

    Note: Type of Document - Acrobat File; prepared on IBM PC ; to print on PostScript; pages: 34; figures: included
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    Web page: http://128.118.178.162

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    1. Neil H. Buchanan, 1996. "A Critique of Competing Plans for Radical Tax Restructuring," Economics Working Paper Archive wp_173, Levy Economics Institute.
    2. E. Philip Howrey & Saul H. Hymans, 1978. "The Measurement and Determination of Loanable-Funds Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 655-685.
    3. D. K. Foley & M. Sidrauski, 1968. "Portfolio Choice, Investment, and Growth," Working papers 24, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
    5. David Bunting, 1991. "Savings and the Distribution of Income," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 14(1), pages 3-22, October.
    6. Christopher D. Carroll & Andrew A. Samwick, 1998. "How Important Is Precautionary Saving?," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 410-419, August.
    7. Lawrence Summers & Chris Carroll, 1987. "Why Is U.S. National Saving So Low?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 607-642.
    8. Matthew D. Shapiro, 1986. "Investment, Output, and the Cost of Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 111-164.
    9. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
    10. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December.
    11. repec:fth:harver:1435 is not listed on IDEAS
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