Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


TAXES AND CHRISTINA ROMER….Brad DeLong says of fellow Berkeley economics professor Christina Romer — who has just been appointed by Barack Obama as head of the CEA — that she is “very good at explaining economics.” That’s good, because I have a question.

Last year Christina and David Romer wrote a paper that attempted to quantify the effect of tax changes on economic growth. I read it at the time and didn’t understand it. I read it again a few minutes ago and I still don’t understand it. So my question is: Can you please explain your paper titled “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks”?

Here’s my understanding of what the paper says. Basically, the Romers looked at every tax measure enacted since 1945 and classified them into two groups. The first group they call endogenous. These are tax changes made in response to current or future economic conditions, including responses to spending changes or recessions. Since the effect of these tax changes is difficult to separate from the effects of the events being responded to, they are discarded.

The second group they call exogenous. These are tax changes designed either to reduce a deficit or to raise long-term growth. Since they aren’t motivated by current or future economic conditions, their effect on the economy is untainted by external factors.

The Romers use this second group to calculate the effect of tax changes on economic growth without confounding factors, and their conclusion is that a tax increase of 1% of GDP reduces output three years later by nearly 3%.

Aside from the difficulties inherent with this kind of classification, I’ve got a few problems with this. First, their methodology eliminates a whole bunch of tax changes simply because their effect is hard to calculate. This might make practical sense, but doesn’t it also introduce a whole new kind of bias?

Second, it assumes that if politicians say a tax increase is designed to spur economic growth or reduce the deficit, then that’s what it’s for. But ever since 1980, conservative politicians have said this about practically every tax cut whether it’s true or not. For this reason, the Romers tag nearly every tax change since 1980 as exogenous. Doesn’t this make their post-1980 analysis a little slippery since it essentially includes all tax changes while the pre-1980 analysis doesn’t?

Third, it doesn’t take into account different kinds of tax changes. If, say, exogenous changes tend to be capital gains cuts while endogenous changes tend to be payroll tax increases, wouldn’t you need to take that into account?

Fourth, there have been tax changes practically every year for the past 50 years. How do you separate the effects of one tax change from another?

Fifth, can it really be true that a 1% tax increase produces a 3% GDP reduction over the long term? European countries tend to have total tax rates that are upwards of 15% higher than ours, which should mean their GDPs are 45% lower. For the most part, however, GDP per hour worked in Europe is only modestly lower than ours.

Anyway, those are my questions. I’ve found very little discussion of the paper on web (see here and here for a couple of exceptions) and I’m curious to know what the economics profession in general thinks of it. Can anyone point me in the right direction?

POSTSCRIPT: One of the Romers’ conclusions, by the way, is that tax increases designed to reduce an inherited deficit have a positive impact on economic growth. So if Obama ever does raise taxes, expect this to be the reason he gives for it. Luckily for him, it will probably be true.

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate