Do Tax Cuts Lead to Economic Growth?

[Gustaf]

I'm disappointed, Beet. Surely, you know as well as I do that this graph doesn't really constitute 'empirical evidence'?

[Gustaf]

I'm disappointed, Beet. Surely, you know as well as I do that this graph doesn't really constitute 'empirical evidence'?

Well, that's true. I must admit I put on different hats depending on who I'm talking to. Still, the chart speaks against tax cuts as being an overwhelming or dominant variable in recent growth.

No, there is something to that point. But to establish correlation, one would like to see a graph that included the tax rate as an explanatory variable rather than just pointing out points in time.

[Gustaf]

I hope that poster is not me.

Certainly looks like a legit study, but I don't have time to look at it in-depth right now.

[Gustaf]

I'd like to discuss this more in-depth but right now PhD math is kind of sucking up all my time (as well as a lot of personal stuff going on).

Beet, do you have an opinion on all the stuff done by Prescott and his disciples about how tax rates affect labour supply and thus GDP?

[Gustaf]

I'd like to discuss this more in-depth but right now PhD math is kind of sucking up all my time (as well as a lot of personal stuff going on).

Beet, do you have an opinion on all the stuff done by Prescott and his disciples about how tax rates affect labour supply and thus GDP?

It seems to me that most of his work is about a fixed marginal tax on labor supply, whereas the "tax cuts" being discussed here are primarily about how progressive the tax curve is. I'm more sympathetic to the notion that across-the-board tax cuts could increase labor supply than I am that cuts in marginal rates would increase labor supply. The former question is essentially the same as asking what the elasticity of labor is. Also there is a disconnect in economics between macroeconomic models like those of Prescott, which tend to find larger overall elasticities of labor supply, and microeconomic models which find small elasticities. I found this paper which seems to suggest that Prescott's methodology is flawed, but you still get high labor elasticitiy if programs such as social security were reformed to make the retirement age more flexible.

From what I've understood the mismatch between micro and macro can largely be explained through more refined methodology. It has to do with things like household action, binary nature of employment, the so-called shadow wage, etc.

Incidentally, Ljungqvist is one of my professors - he taught me in Macro a couple of years ago. The paper you link was part of my course literature last year too.

[Gustaf]

I'd like to discuss this more in-depth but right now PhD math is kind of sucking up all my time (as well as a lot of personal stuff going on).

Beet, do you have an opinion on all the stuff done by Prescott and his disciples about how tax rates affect labour supply and thus GDP?

It seems to me that most of his work is about a fixed marginal tax on labor supply, whereas the "tax cuts" being discussed here are primarily about how progressive the tax curve is. I'm more sympathetic to the notion that across-the-board tax cuts could increase labor supply than I am that cuts in marginal rates would increase labor supply. The former question is essentially the same as asking what the elasticity of labor is. Also there is a disconnect in economics between macroeconomic models like those of Prescott, which tend to find larger overall elasticities of labor supply, and microeconomic models which find small elasticities. I found this paper which seems to suggest that Prescott's methodology is flawed, but you still get high labor elasticitiy if programs such as social security were reformed to make the retirement age more flexible.

From what I've understood the mismatch between micro and macro can largely be explained through more refined methodology. It has to do with things like household action, binary nature of employment, the so-called shadow wage, etc.

Incidentally, Ljungqvist is one of my professors - he taught me in Macro a couple of years ago. The paper you link was part of my course literature last year too.

Sometimes I envy you guys... then I think of all the math that you have to do.

Yep, I'm currently drowning in math problems.

[Gustaf]

Well, Gully, I'd interpret the question as "in general and in the Western world"