Quote from Max E. Pad:
Christina Romer Knows Tax Hikes Will Kill the Recovery
A powerful analysis by President Barack Obamaâs first Chair of his Council of Economic Advisers (CEA) indicates the Presidentâs proposed tax increases would kill the economic recovery and throw nearly 1 million Americans out of work. Those are the extraordinary implications of academic research by Christina D. Romer, who chaired the CEA from January 28, 2009 â September 3, 2010. In a paper entitled: âThe Macrcoeconomic Effects of Tax Changesâ published by the prestigious American Economic Review in June 2010 (during her tenure at the White House), she stated: âIn short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.â
Although Dr. Romerâs analysis is full of equations and econometric jargon, the clarity of her conclusions are a fatal indictment of the Obama Administrationâs demand for tax increases. In what may be the first time since David Stockmanâs âTrojan Horseâ comment regarding the Reagan tax rate cuts, a high White House Official has completely undermined her own Administrationâs policy while serving. Had this happened during a Republican administration, a la Stockmanâs Atlantic interview, it would have been Page One news. âObama To America: Drop Dead.â
The AER paper, co-authored with her husband and fellow UC Berkeley Professor, David H. Romer, examines the impact of tax increases and reductions on U.S. economic growth for the period 1945 to 2007. One of the innovations in the paper is its focus on âexogenousâ changes in taxes, that is changes in taxes that were meant to either increase the rate of economic growth (not simply offset a recession), such as the Kennedy, Reagan and Bush tax cuts, or to reduce the budget deficit, such as the Clinton tax increase. Excluded were âendogenousâ tax changes that were purely countercyclical, such as the 1975 tax rebates, or were used to âoffset another factor that would tend to move output growth away from normalâ, such as the tax increases to finance the Korean war and the introduction of the payroll tax to finance Medicare.
âThe behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.â
Wow! Thatâs about as strong a statement as you will ever read in a paper published in the AER.
The Romersâ baseline estimate suggests that a tax increase of 1% of GDP (about $160 billion in todayâs economy) reduces real GDP by 3% over the next 10 quarters.
In addition, the Romers used a variety of statistical tests to take into account other factors that could influence economic growth at the time of the tax changes, including government spending, monetary policy, the relative price of oil, and even whether the President was a Democrat or Republican (it doesnât matter much). A summary of the statistical work estimates that a tax increase of 1% of GDP would lead to a fall in output of 2.2% to 3.6% over the next 10 quarters.
âIn all cases, the effect of tax changes on output remains large and highly statistically significant,â they write.
âThus the finding that tax changes have substantial impacts on output appears to be very durable. That including controls for known output shocks has little effect on the estimated impact of tax changes is important indirect evidence that our new measure of fiscal shocks is not correlated with other factors affecting output.â
