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THE WELFARE EFFECTS OF TEMPORARY TAX CUTS AND SUBSIDIES: THEORY, ESTIMATION, AND APPLICATIONS
Author(s) -
Phillips Mark D.
Publication year - 2016
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12223
Subject(s) - economics , subsidy , welfare , deadweight loss , cash , microeconomics , ambiguity , estimation , monetary economics , econometrics , public economics , macroeconomics , linguistics , philosophy , management , market economy
This article presents a tractable and intuitive theory on the welfare effects of temporary tax cuts and subsidies, fiscal policies that I generically term “holidays.” The Kaldor–Hicks efficiency effects are theoretically ambiguous, with competing pro‐ and anti‐efficiency effects on newly incentivized versus time‐shifted purchases. To rectify this ambiguity I derive expressions for the welfare effects that are consistent with constant elasticity assumptions and depend only upon readily and reliably observed information. To demonstrate the framework's broad applicability, I analyze two different policies: the 2009 Cash for Clunkers program and states' sales tax holidays. I estimate that both policies generated substantial deadweight loss. ( JEL H21, H30, D91)