Stimulus Spending: The Problem With Implicit Taxation

by: Casey Mulligan

The Congressional Budget Office has a report on the effects of the "stimulus" law. To its credit, it does attempt to address some of those who say that the "stimulus" law did not stimulate (see its appendix).

However, it does not address the single biggest criticism I have made on this blog, on TV, and elsewhere: That much of the stimulus spending (and many of the so-called tax cuts) goes only to persons and businesses in financial hardship, and thereby serves as a tax on success. In other words, stimulus spending is an implicit income tax, and thereby reduces national income rather than increasing it.

Implicit taxes have been familiar to economists for decades, and are widely acknowledged to be a big part of the economics of pensions, unemployment insurance, welfare, and other programs: the CBO and so many other economists have no excuse for ignoring them.

The CBO claims to be critical of general equilibrium models (although it approvingly cites a bunch New Keynesian general equilibrium models), but the problem with implicit taxes has nothing to do with general equilibrium reasoning.

The CBO also offers some critiques of "rational models", although the problem with implicit taxes has nothing to do with rationality, either.