Stabilizing the Economy Through the Income Tax Code
9 Pages Posted: 2 Sep 2009 Last revised: 15 Oct 2009
This note examines how the income tax code can be altered to stabilize the economy in the face of fluctuations. First, the note suggests that tax expenditures for goods with high income elasticities should be replaced with government spending, while tax expenditures for inferior goods should be expanded. Second, income tax rates should be indexed to the growth rate of the economy, with marginal rates higher in boom periods and lower in recessions. Finally, implicit tax expenditure subsidies should be decoupled from marginal rates via the use of tax credits. All of these recommendations will enhance the stabilizing effect of the income tax in the current era of economic uncertainty.
Keywords: Fiscal Policy, Tax Policy, Stabilization, Tax Expenditures
JEL Classification: E6, H2
Suggested Citation: Suggested Citation