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Amtrak, water, sewer spending reduced to make room for tax cuts

"…we took money out of Amtrak and out of aviation… the Corps of Engineers, reduced the water infrastructure program, the drinking water and the wastewater treatment facilities and sewer lines, reduced that from $14 billion to roughly $9 billion — was the tax cut initiative that had to be paid for in some way by keeping the entire package in the range of $850 billion."

Oberstar: Mass Transit Got the Shaft to Make Room For Tax Cuts
By Elana Schor – January 21, 2009, 5:48PM
From Talkingpointsmemo

I am getting very tired of linking to Stiglitz, but, dang it, he has a new interview criticizing tax cuts as part of stimulus bill, which seems informative:

Do not squander America’s stimulus on tax cuts
By Joseph Stiglitz
Published: January 15 2009 19:48

By the way, Stiglitz criticizes the use of a paper by Christine Romer (The macroeconomic effect of tax changes: estimates based on a new measure of fiscal shocks) to justify using tax cuts as the best and strongest stimulus. The paper supposedly says that a tax cut of 1% of GDP will produce a 3% increase in GDP. I do not know of Stiglitz has read the paper, but I agree with him that it is not a strong case for tax cuts as a countercyclical policy.

The paper looks at exogenous tax changes that were not adopted for countercyclical policy. When the authors look at countercyclical tax cuts specifically, on average, they take 1.5 years to increase GDP by 1%, and 2.25 years to get 2%. The authors do not do not look much into the reasons for this difference that I can see. In fact, one of the main conclusion of the piece is that simply looking at the size of tax cut may not tell us very much about how it will effect the economy.

Even for what they consider to be exogenoug tax cuts unrelated to countercyclical policy, the large effect of the exogenous tax takes awhile to materialize: on average about 1 year for 1%, 1.75 years for 2% and 2.5 years for the full 3%.

Also, the estimated effect of exogenous tax changes is much smaller after 1980:

“Figure 13 shows that the effects of tax changes appear to have become considerably smaller. For the early period, the estimated maximum effect of an exogenous tax increase of one percent of GDP is a fall in output of 3.9 percent. For the later period, it is a fall of 2.3 percent.”

(note: just reverse the direction of change in GDP to go from a tax increase to a tax cut0.

And, if you look at Figure 13, on average, countercyclical tax cuts do virtually nothing for the first year, and take 1.5 years to increase GDP by 1%.

The paper does not seem to provide much evidence that a tax cut is the best way for quick and strong stimulus, and I see no evidence that authors’ intended it to be used for such a purpose.

The Romer paper can be found here.

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