Feed on

From Russ Roberts:

an increase in spending coupled with lower tax collections is an INCREASE in taxes. AN INCREASE in taxes. NOT A TAX CUT. If I spend more money and collect less, the government is promising to collect more taxes in the future. It is not a tax cut. Not a tax cut. Not a tax cut. And when you don’t cut rates but rather give people a lump sum of $500, there are no incentive effects other than to increase the probability that the US Treasury will be unable to honor its obligations in the future.

For clarification, the reason a lump sum tax rebate does not have the same work incentive effects as a reduction in tax rates is that a lump-sum rebate does not change the “price” of leisure time. In other words, there is no change in the rewards to working (or on the flip side, no change in the opportunity cost of taking leisure time). A lump sum rebate has only an income effect, and if anything, might be expected to reduce the incentives to work, all else equal. Of course, the rebate is structured as a payroll tax rebate – so it will not affect the extensive margin (i.e. whether to work or not) but any work affect it has will be at the intensive margin (i.e. how many hours to work, given that I am already working). A fun intermediate micro question would be to demonstrate how such a rebate could affect the decision to work at all.

Leave a Reply