The Effect of Tax Expenditures on Automatic Stabilizers: Methods and Evidence

Abstract

We study the effect of tax expenditures on the stabilizing power of the tax system. We propose a microsimulation strategy which exploits links that we identify between automatic stabilizers, tax expenditures, and effective marginal tax rates. Using United States tax return microdata from 2000 to 2010, we estimate that, on average, the mortgage interest deduction and the charitable contributions deduction decreased the ability of the tax system to absorb fluctuations in aggregate consumption by an average of 7.4% and 3.9%.

Keywords: Tax Expenditures, Automatic Stabilizers

JEL Classification: K34, H24, H31, E62