Phased-In Tax Cuts and Economic Activity

Abstract

Legislating predictable changes in tax rates violates one of the cardinal principles of pub-lic finance: changes in tax rates should be permanent and immediate. Taxation typically distorts economic behavior and, because the deadweight burden of taxation is a convex function of the tax rate, there are efficiency gains to equalizing tax rates over time. As Robert J. Barro (1979) argues, this logic im-plies that changes in tax rates should be unpre-dictable, that is, tax rates should follow random walks.1 In practice, however, government policy frequently ignores these principles and often specifies that tax rates follow various phase