SQ2A Ricardian Tax Cut

SQ2A Ricardian Tax Cut - A Ricardian Cat? In May 2001,...

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Unformatted text preview: A Ricardian Cat? In May 2001, Congress passed, and President Bush the Economic and Tax Relief Reconciliation Act (EGTRRA) of 2001, which featured both short-run and long-run tax cuts. In the short run, and in response to concerns about the ongoing the rebates were as large as $300 for an individual, $500 for a head of household, and $600 for a married couple. The longer-run tax cut provided by EGTRRA decreased income tax rates. For couples filing a joint return, the tax rate on the first $12,000 of income was reduced from 15% to 10%. The highest tax rate, paid by upper—income taxpayers, was to be reduced to 35% from 39.6% over a five-year period, and other tax rates would be reduced by 3 percentage points over a five-year period. Largely as a result of bill, Federal receipts in the third quarter of 2001 were $180.3 billion adjusted at annual rates) lower than in the first quarter of that year. If the Ricardian equivalenceproposition holds, then a tax cut should have no effect on constimp’tion or national saving. Specifically, although a tax cut reduces government saving by reducing the budget surplus, Ricardian equivaknce‘ suggests that the tax cut should increase private saving by an equal amount, leaving national saving (the sum of government saving and private saving) unchanged. ’ The accompanying table compares various components of national saving in the first quarter of 2001, before the tax cut was enacted, and in the third quarter of 2001, after taxpayers had begun to receive rebates and to benefit from reductions in tax rates. Government saving fell by $277 billion (at an annual rate) from the first quarter to the third quarter of 2001, reflecting the losses in tax revenue. But during this time period, private saving increased by $180 billion, so that national saving fell by much less than government saving fell from the first quarter to the third quarter. Private saving increased by about two thirds of the decrease in government saving, so that national saving declined by only abOut one third of the decrease in government saving. (Remember, Ricardian equivalence applies to changes in taxes or transfers, but not to changes in government saving that arise from changes in government purchases. In this episode, most of the change in government saving stemmed from reduced taxes and increased transfer payments, though some of the decline in government saving reflected an increase in government purchases.) _ Surveysof consumers showed that most of them, in fact, saved the tax rebates they received in 2001. Matthew D. Shapiro and Joel Slemrod of the University of Michigan found that less than one-quarter of households said they mostly spent the tax rebates they received in 2001.8 The low spendingrate means that the tax rebates did not stimulate the economy as much as the government had hoped when it passed the tax cuts into law. ' Ricardian Equivalence and the Tax Cut of May 2001 I- '2001n1 . .r 1001123 9 «:1: ."(Change 1354.1 .1 1533.3 3 3 179.7 : Private Saving; .1335 261.6 1239 Business V ‘_ 1215.5 V 02722 56.? Government Saving >' 3.91.2 ' 2114.1 V 427.1 _ Federalig 144.5 . ~02, 3 —244.7. a _ State and local: L A 146.7 , (114.3 g , ‘—32..4' , NationalSaving ._ $17453 1547.9 997.4 ? Note: Amcunts in billions bf dollars Source: BEA Web site, www.bea.gov, Table 5.1. 8”Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys,” in James Poterba, ed., Tax Policy and the Economy 17 (Cambridge, MA: MIT Press, 2003), pp. 83—109. ...
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SQ2A Ricardian Tax Cut - A Ricardian Cat? In May 2001,...

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