Sunday, April 15, 2007

1% Tax Increase = 3% GDP Decrease

From Greg Mankiew's Blog, a reference to THIS study:

"The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a
powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases."


Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.