Andrew Mountford and Harald Uhlig recently released a working paper called, What are the Effects of Fiscal Policy Shocks.  The paper looks at the affects of various fiscal policies on GDP, which is an important topic given the current Congressional debate on the need for further stimulus spending. 

The three were: deficit spending;   deficit financed tax cut; and balance budget spending expansion.  Their conclusion was deficit financed tax cuts provided the highest short-run returns to GDP—the opposite of the fiscal stimulus passed by Congress in February.

Harvard economists N. Gregory Mankiw, Matthew Weinzierl, and Danny Yagan recently published a paper which looked at the “interplay between tax theory and tax policy.”  It rightly shows that there is a wide dichotomy between the tax theories proposed by academic economists and what is actually implemented in Washington and the state capitals.  The authors hope to close the gap between the two extremes by offering “lessens policymakers might take from the academic literature on how taxes ought to be designed.”  It is a paper worth ready by those who participate in the formation of tax policy.

Most experts agree the cause of the current economic downturn—the bursting of the housing bubble in 2007.  Some economists argue the creation of the bubble was the result of government intervention in the housing market, e.g. low interest rates, support of Fannie Mae and Freddie Mac, and through the tax code with the deduction of interest payments and property taxes on a home owner’s federal taxes. 

Economists refer to tax deductions as tax expenditures, which are defined as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”

This paper by Yale law professor Yair Listokin looks at tax expenditures from the stand point of their impact on the business cycle.  Listokin’s conclusion is tax expenditures are pro-cyclical.  This means when the economy is growing, they add to the growth, but when the economy slides into a recession, they deepen the contraction. 

The paper comes from the Keynesian viewpoint that government intervention in the economy can smooth the business cycle, i.e. dampen the peaks and troughs.  Listokin believes it is better for government to use government spending rather than manipulation of the tax code to achieve its policy goals.  Though the paper does not advocate a decline in the size of the federal government, free-market economists, who believe the use of targeted tax deductions distorts the economy, would benefit from reading this paper.

 This non-technical paper provides some straightforward arguments against the current legislative proposal to reduce carbon emissions via cap and trade.  The two authors believe global-warming is a serious problem and carbon emissions need to be addressed—but cap and trade legislation is not the way to do it.  Their proposal is for the federal government to implement a more efficient carbon tax on the production of oil, coal, and natural gas.  

Avi-Yonah and Uhlmann argue that while cap and trade provides benefit certainty—i.e. the government can set obtainable reductions in carbon emissions—it does not provide cost certainty.  Other deficiencies in cap and trade include:  1) the likely delay in implementation due to prolonged litigation by effected parties; 2) problems of setting base-lines for emission targets and how to price them; 3) such a program is untested on a global scale; 4) the legislation would allocate allowances for free—which could lead to abuse by members of Congress as the distribute allowances to constituents and donors; 5) and this type of program would be difficult to enforce.

The authors feel the need for a tax because of the classic argument of externalities.  They say a carbon tax should be imposed on all oil, coal, and natural gas production.  They like it because it “captures what is now an externality, namely the harmful effects of carbon dioxide emissions.”  A carbon tax is easier to implement and would start to reduce carbon emissions faster (the Lieberman-Warner Climate Security Act of 2008 is over 300 pages while the carbon tax proposal by Rep. John B. Larson was only 17 pages.)  The carbon tax creates greater economic efficiency as it provides greater cost certainty to the producers of coal, oil, and natural gas—something cap and trade does not.

If one is looking for arguments to use against cap and trade legislation in the upcoming debate they would be wise to read this paper. 

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The Washington Post

Heritage Foundation

Of course what the federal government gives with one hand it takes with the other. A $6.3 billion increase in the federal cigarette excise will reduce the disposable incomes of residents in the states. Table 1 shows that this reduction ranges from $581 million in California to $10.8 million in the District of Columbia.

Link to Paper

I focus on Judge Posner’s tax jurisprudence for three reasons. First, he is a leading proponent of the law and economics approach. Second, he has authored over 60 opinions in tax cases. Finally, few question the appropriateness of applying economic reasoning to tax questions. Accordingly, these cases provide a rich and substantial body of material with which to work.

In highlighting and evaluating the ways in which Judge Posner has used economic analysis to decide tax cases, I hope to provide insights and guidance on the strengths and limitations of this approach to others who may be urged or tempted to follow suit.

Link to Paper

Link to Paper