Taxes, Transfers, and Economic Stability

Abstract

a static macroeconomic model [4, 7]. More recently, an ingenious application of the Leontief input-output model has been utilized by Nos6 [5] to estimate the amount of built-in flexibility on a more disaggregated basis for Great Britain, and a measure which is applicable in a dynamic model has been suggested by Smyth [9].1 The present paper is concerned with measuring the amount of built-in flexibility, which can be attributed to taxes on personal income and government transfer payments to individuals, in the U.S. economy since the Korean War. A simple dynamic model of aggregate demand, making extensive use of distributed lag relationships, is used for this purpose, providing estimates of the time lags involved in the working of the automatic stabilizers. It has been shown that under certain conditions they may become destabilizers in terms of their cumulative effects and hence should not necessarily be viewed as a source of unmixed blessings. This paper further differs from previous efforts in that it utilizes quarterly, rather than annual, data and includ s transfer payments. In the following section the model is specified, and the theoretical implications of the lag structure are briefly examined. Aggregate supply is not considered so that the price level, real and money wage rates, and the level of employment are not built into the model. It is next shown how the automatic stabilizers may increase the amount of instability with the aid of a simple numerical example, and the remainder of the paper deals with the statistical estimation of the model's coefficients, its impact and long-run multipliers, and both the static and dynamic coefficients of built-in flexibility. The dynamic coefficients are calculated for transfer payments and personal income taxes taken both separately and together for the sample period. Inasmuch as transfers do not behave in the