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How Income Taxes Should Change During Recessions

Tax Law Review, Forthcoming

39 Pages Posted: 18 Jul 2017  

Zachary D. Liscow

Yale University - Law School

William A Woolston

Stanford University - Department of Economics

Date Written: April 2, 2017

Abstract

This paper offers recommendations for how the design of labor income taxes should change during recessions, based on a simple model of a recessionary economy in which jobs are rationed and some employees value working more than others do. The paper draws two counter-intuitive conclusions for maximizing social welfare. First, subsidize non-employment. This draws marginal workers out of the labor force, creating “space” for those who really need jobs. Second, subsidize employers for hiring, not the employees themselves. The problem during recessions is having too few jobs; subsidizing employers creates more jobs, while subsidizing employees confers benefits on those who already won the job lottery. Tax policy in the recent recession has done a poor job of following these recommendations.

Keywords: tax policy, income taxation, tax law

Suggested Citation

Liscow, Zachary D. and Woolston, William A, How Income Taxes Should Change During Recessions (April 2, 2017). Tax Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2752728

Zachary D. Liscow (Contact Author)

Yale University - Law School ( email )

127 Wall St.
New Haven, CT 06511
United States

William A Woolston

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

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