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Taxes Versus Spending Study

1 min readBy: Justin Higginbottom

Here is a new NBER paper, “Large Changes in Fiscal Policy: Taxes Versus Spending,” investigating the effects of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es and spending on economic growth and deficit/debt reduction. The authors are a couple of Harvard economists (Alesina, Ardagna). The abstract reads:

We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. s. We confirm these results with simple regression analysis.