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Anti‐Stagflationary Tax Cuts and the Problem of Investment

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  • IAN M. McDONALD

Abstract

If prices are affected by both cost‐push and demand‐pull factors then a change in the policy mix towards fiscal ease can improve output, employment and the balance of trade without the price level rising. However the policy change may reduce investment and so affect the intertemporal allocation of resources. This paper derives conditions for tax cuts to ameliorate inflation and unemployment without a sacrifice of future output. Numerical examples suggest that one can have no presumption that the conditions are or are not likely to hold in general. The discussion is related to Corden's recent analysis of a ‘free lunch’.

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  • IAN M. McDONALD, 1984. "Anti‐Stagflationary Tax Cuts and the Problem of Investment," The Economic Record, The Economic Society of Australia, vol. 60(3), pages 284-293, September.
    • Handle: RePEc:bla:ecorec:v:60:y:1984:i:3:p:284-293
    DOI: 10.1111/j.1475-4932.1984.tb00863.x
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    References listed on IDEAS

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    1. Robert J. Gordon, 1971. "Inflation in Recession and Recovery," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 2(1), pages 105-166.
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    3. Corden, W M & Dixon, P B, 1980. "A Tax-Wage Bargain in Australia: Is a Free Lunch Possible?," The Economic Record, The Economic Society of Australia, vol. 56(154), pages 209-221, September.
    4. J. O. N. Perkins, 1979. "The Macroeconomic Mix to Stop Stagflation," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-16039-6, December.
    5. Kaldor, Nicholas [Lord], 1976. "Inflation and Recession in the World Economy," Economic Journal, Royal Economic Society, vol. 86(344), pages 703-714, December.
    6. Corden, W M, 1981. "Taxation, Real Wage Rigidity and Employment," Economic Journal, Royal Economic Society, vol. 91(362), pages 309-330, June.
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