By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars. The puzzle is that, taken together, these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favorite textbook, spending multipliers necessarily exceed tax multipliers.
How can these empirical results be reconciled? One hypothesis is that that compared with spending increases, tax cuts produce a bigger boost in investment demand. This might work through changing relative prices in a direction favorable to capital investment--a mechanism absent in the textbook Keynesian model.
Suppose, for example, that tax cuts are not lump-sum but instead take the form of cuts in payroll taxes (as suggested by Bils and Klenow). This tax cut would reduce the cost of labor and, if labor and capital are complements, increase the demand for capital goods. Thus, the tax cut stimulates demand not only by increasing disposable income and consumption spending (the textbook Keynesian channel) but also by incentivizing more investment spending. A similar result might obtain if the tax cut included, say, an investment tax credit.
The breastpiece of resolution should be made. The High Priest who crafted his work with wisdom of symbols and words “he must understanding the present of light of the past for purposes of the future”( Keynes) embroidered like the ephod. Say people take $1000 per week instead $700, because of tax cut, he surely spend this $300 immediately if not all least partly. I mean what is so coy about stimulus, if you want HAVE earth shaking multiple peaks = it have to be huge robust BANG not only once but continuously…! Think about it the very act of act stimulus not economist sense but biology senses. when a system shut down because of depression indirect subtle brain bonking doesn’t excite you much but direct encountering is much faster better peaks. Gosh what a squadron! How dreary saying like “ email me bula blua..” everyone email to everyone nothing magic about emailing I email everyone everyday what a boring email, it must be tailored tasteless cold turkey tacky full blown measles fat scum only!
