Large Changes in Fiscal Policy: Taxes Versus Spending
We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.
Prepared for Tax Policy and the Economy 2009. We thank Jeffrey Brown, Roberto Perotti, Matthew Shapiro and other conference participants for useful comments and discussions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Large Changes in Fiscal Policy: Taxes versus Spending, Alberto Alesina, Silvia Ardagna. in Tax Policy and the Economy, Volume 24, Brown. 2010