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Phased-In Tax Cuts and Economic Activity

  • Christopher L. House

    (University of Michigan)

  • Matthew D. Shapiro

    (University of Michigan & NBER)

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://econwpa.repec.org/eps/mac/papers/0404/0404009.pdf
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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  2. N. Gregory Mankiw, 1986. "Government Purchases and Real Interest Rates," NBER Working Papers 2009, National Bureau of Economic Research, Inc.
  3. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 513-42, August.
  4. Robert E. Hall, 2004. "Measuring Factor Adjustment Costs," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 899-927, August.
  5. repec:rus:hseeco:95340 is not listed on IDEAS
  6. 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.
  7. Alan J. Auerbach, 2002. "The Bush Tax Cut and National Saving," NBER Working Papers 9012, National Bureau of Economic Research, Inc.
  8. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  9. 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.
  10. 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.
  11. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc.
  12. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  13. 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..
  14. Robert E. Hall, 2002. "Industry Dynamics with Adjustment Costs," NBER Working Papers 8849, National Bureau of Economic Research, Inc.
  15. Alan J. Auerbach, 2004. "Budget Windows, Sunsets, and Fiscal Control," NBER Working Papers 10694, National Bureau of Economic Research, Inc.
  16. Henry S. Farber, 2003. "Is Tomorrow Another Day? The Labor Supply Of New York Cab Drivers," Working Papers 110, Princeton University, Department of Economics, Center for Economic Policy Studies..
  17. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  18. 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.
  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.
  20. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  21. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  22. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  23. James Poterba, 2004. "Taxation and Corporate Payout Policy," NBER Working Papers 10321, National Bureau of Economic Research, Inc.
  24. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  25. Matthew D. Shapiro & Joel Slemrod, 2003. "Consumer Response to Tax Rebates," American Economic Review, American Economic Association, vol. 93(1), pages 381-396, March.
  26. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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  28. Henry Farber, 2003. "Is Tomorrow Another Day? The Labor Supply of New York Cab Drivers," NBER Working Papers 9706, National Bureau of Economic Research, Inc.
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