The long (and short) on taxation and expenditure policies

Much of the 1992 presidential campaign focused on which fiscal policies would best promote economic growth. In this article, Zsolt Becsi develops an analytical and graphical framework to evaluate the long- and short-run effects of a variety of taxation and expenditure policies. ; Becsi shows that many tax schemes in their macro-economic effects are essentially taxes on labor or capital or both. While taxes on labor and capital both tend to depress private consumption and output in the long run, Becsi shows that a revenue-neutral reduction of capital taxes and increase in labor taxes are likely to be contractionary in the short run and expansionary in the long run. ; Becsi discusses several ways of spending the peace dividend from a reduction in defense expenditures. He shows that use of the dividend to reduce capital taxes causes consumption to rise in the long run with ambiguous effects on output. In the short run, output and consumption will move in opposite directions, but whether output rises or falls is uncertain. Using the peace dividend to increase public investment will also promote a long-run rise of consumption with ambiguous long-run output effects, but without short-run contractionary effects.