Friday, July 23, 2010

Reality Test

In a paper in the American Economic Review of June 2010 on the effects of tax increases on the American economy the following conclusion is reached -

Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.

Those are pretty robust effects.   The AER is a pretty respected journal, not some e-journal for crackpots.  The conclusions are not actually surprising - raise taxes and reduce output.  So one could expect that the results are pretty accurate.   So who said it?

The paper is by  Christina D. Romer and David H. Romer - David Romer is the Herman Royer Professor of Political Economy at UC Berkeley.  His wife was also at Berkeley and holds the Class of 1957 Garff B. Wilson Professor of Economics at Berkeley but she is also the Chair of the Current Administration's Council of Economic Advisors.

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