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Phased-In Tax Cuts and Economic Activity

Listed author(s):
  • Matthew D. Shapiro
  • Christopher L. House

This paper uses a dynamic general equilibrium model to analyze and quantify the aggregate effects of the timing of tax rate changes enacted in 2001 (which called for successive rate reductions through 2006) and 2003 (which made immediate tax rate cuts scheduled for 2004 and 2006). The phased-in nature contributed to the slow recovery from the 2001 recession, while the elimination of the phase-in helped explain the increase in economic activity in 2003. The simulations suggest while the tax policy was a drag on the economy in 2001 and 2002, it increased economic growth in 2003, once phase-ins were eliminated. (JEL D58, E32, E62, H24, H25, O41)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.96.5.1835
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File URL: http://www.aeaweb.org/aer/data/dec06/20040257_data.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 5 (December)
Pages: 1835-1849

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:5:p:1835-1849
Note: DOI: 10.1257/aer.96.5.1835
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References listed on IDEAS
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  1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
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  8. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 513-542.
  9. Mankiw, N Gregory, 1987. "Government Purchases and Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 407-419, April.
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  11. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
  12. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
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  16. Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters,in: Taxes and Capital Formation, pages 85-88 National Bureau of Economic Research, Inc.
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  19. Robert E. Hall, 2002. "Industry Dynamics with Adjustment Costs," NBER Working Papers 8849, National Bureau of Economic Research, Inc.
  20. Miles S. Kimball & Matthew D. Shapiro, 2008. "Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?," NBER Working Papers 14208, National Bureau of Economic Research, Inc.
  21. Henry S. Farber, 2003. "Is Tomorrow Another Day? The Labor Supply of New York City Cab Drivers," Working Papers 852, Princeton University, Department of Economics, Industrial Relations Section..
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  23. Auerbach, Alan J., 2002. "The Bush Tax Cut and National Saving," National Tax Journal, National Tax Association, vol. 55(3), pages 387-407, September.
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  28. Robert E. Hall, 2004. "Measuring Factor Adjustment Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 899-927.
  29. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 537-579.
  30. Jennifer L. Blouin & Jana Smith Raedy & Douglas A. Shackelford, 2004. "Did Dividends Increase Immediately After the 2003 Reduction in Tax Rates?," NBER Working Papers 10301, National Bureau of Economic Research, Inc.
  31. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
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