Budget Deficits and Macroeconomic Policy by J. O. N. Perkins (auth.)

By J. O. N. Perkins (auth.)

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1 shows that this simulation suggests that direct tax changes have a greater effect on both the level and rate of growth of real GDP on the average over a period of both three and five years than do government non-wage expenditures for the same effect on the budget deficit; and that by the third or the fifth year simulated the effect on the level of GDP is also greater for the package of direct taxation simulated than for an increase in government non-wage expenditure. 0) The simulation used is that with unchanged real interest rates (an 'accommodating' monetary policy).

It is understood from the authors that it is a range of direct taxation - income tax and social security contributions - that is being simulated. Presumably the relative importance of the principal tax changes assumed in the simulations is similar to the proportions of these various taxes for the OECD as a whole. But this still leaves open the question whether tax changes of a similar order concentrated in particular types of (direct) taxation would or would not have similar effects. At any rate, so long as it is true that particular types of tax increase have bigger relative effects on the macroeconomic target in question than do others, it must be possible to find some ways of increasing taxation by a given amount that will have different relative effects on real output from others.

4 was that government non-wage expenditure in the US had a somewhat larger effect on real GDP (over the Effects on Real Output 29 total of the years 1,2,3 and 7 after the change) than cuts in personal income taxation - but the difference was not great, whereas government expenditures had an effect of the order of two to three times as large as do the type of personal income tax cuts simulated by McKibbin and Bagnoli. 7 also shows the simulated effects of these measures over three years. It may be seen that the ranking of the measures is not radically different over this shorter period, except that a corporation tax cut has a much smaller effect than government spending over this shorter period, and government investment spending has a relatively greater effect over the shorter period than the longer one.

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Budget Deficits and Macroeconomic Policy by J. O. N. Perkins (auth.)
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