Equity, Efficiency, and Stability: The Importance of Macroeconomics for Evaluating Income Tax Policy

45 Pages Posted: 4 Apr 2009 Last revised: 29 Jan 2012

Date Written: January 15, 2012

Abstract

In this period of economic uncertainty, tax scholars must examine income tax policy from a macroeconomic perspective. The standard lenses of efficiency and equity no longer suffice. To highlight the importance of the macroeconomic perspective, this Article demonstrates that most tax expenditures are procyclical, exacerbating the business cycle. Tax expenditures effectively offer government subsidies for certain activities, such as charitable giving or home purchases. Because these activities vary with the business cycle, tax expenditures are higher at business cycle peaks than at business cycle troughs. The more a given activity varies in tandem with the business cycle, the greater the procylicality of the tax expenditure. While recent income tax and government spending policies have been explicitly devoted to stimulating the economy, the destabilizing impact of tax expenditures quietly negate much of the impact of fiscal stimulus measures. Our inability to discern tax expenditures’ hidden destabilizing impact is symptomatic of a general neglect of macroeconomics in income tax policy. To avoid introducing and perpetuating further destabilizing forces into the current era of general economic uncertainty, macroeconomic perspectives should assume a more prominent place in tax policy discourse

Keywords: tax, business cycle, Keynes, fiscal policy, Tax Expenditures

Suggested Citation

Listokin, Yair, Equity, Efficiency, and Stability: The Importance of Macroeconomics for Evaluating Income Tax Policy (January 15, 2012). Yale Journal on Regulation, Forthcoming, Yale Law & Economics Research Paper No. 378, Available at SSRN: https://ssrn.com/abstract=1372782

Yair Listokin (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-436-2567 (Phone)

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