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The Welfare Effects Of Temporary Tax Cuts And Subsidies: Theory, Estimation, And Applications

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  • Mark D. Phillips

Abstract

type="main" xml:id="ecin12223-abs-0001"> 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)

Suggested Citation

  • Mark D. Phillips, 2016. "The Welfare Effects Of Temporary Tax Cuts And Subsidies: Theory, Estimation, And Applications," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 612-632, January.
    • Handle: RePEc:bla:ecinqu:v:54:y:2016:i:1:p:612-632
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    File URL: http://hdl.handle.net/10.1111/ecin.2016.54.issue-1
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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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