THE WELFARE EFFECTS OF TEMPORARY TAX CUTS AND SUBSIDIES: THEORY, ESTIMATION, AND APPLICATIONS

Mark D. Phillips

Economic Inquiry, 2016, vol. 54, issue 1, 612-632

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)

Date: 2016
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