Jeffrey R. Brown

English

Research Papers in Economics

 
Introduction, Volume 24 
By Jeffrey R. Brown 
 
This year’s Tax Policy and the Economy conference, which was held at the National 
Press Club on September 24, 2009, occurred in the midst of a period of tremendous 
economic change.  Since the last TP&E conference was held one year ago, we have 
experienced the deepest global recession since the Great Depression, witnessed an 
historic U.S. presidential election, watched the U.S. government take a major ownership 
stake in the U.S. automobile industry, seen the Federal Reserve and U.S. Treasury 
undertake unprecedented actions in an attempt to stabilize credit and financial markets, 
watched Congress pass a large economic stimulus bill, and debated far-reaching reform 
of the health care industry.  These and numerous other changes have been so profound 
that economists, policymakers and ordinary citizens are already referring to life “before” 
and “after” the end of calendar year 2008 as if they are different worlds. 
 
In times such as these, high quality, policy relevant academic research has never been 
more important.  This year’s Tax Policy and the Economy conference continues the 24-
year tradition of facilitating timely interaction between leading NBER researchers and the 
Washington, D.C. policy community.  Indeed, it is notable that Lawrence Summers, the 
NBER researcher who served as the first organizer of this conference and as the first 
editor of this volume, now serves as President Obama’s economic advisor and Director of 
the National Economic Council.  Numerous other contributors to past issues of Tax 
Policy and the Economy also hold positions of tremendous influence throughout the U.S. 
government, including our lunch speaker at this year’s conference, Austan Goolsbee.   
 
This year’s conference included six papers on topics ranging from topics as broad as the 
relative efficacy of tax cuts versus spending increases as a form of economic stimulus, to 
targeted analysis of the Low Income Housing Tax Credit.  These papers, which appear in 
the six subsequent chapters of this volume, illustrate depth and breadth of the research 
capabilities of NBER research associates. 
 
The first paper in this volume is entitled “Investment in Energy Infrastructure and the Tax 
Code.”  Its author, Gib Metcalf, reviews the complex array of tax incentives for energy 
investment in the U.S. and constructs estimates of the effective tax rates for a wide range 
of capital investments in the energy sector.  He documents substantial heterogeneity in 
these effective tax rates.  He then examines in detail the relationship between investment 
in wind generation capital and the user cost of capital, finding an elasticity of investment 
with respect to the user cost of capital in the range of -1 to -2.  This paper illustrates that 
energy sector capital investment is sensitive to tax treatment.  He also specifically 
demonstrates that the federal production tax credit has played an important role in 
stimulating investment in wind over the past two decades. 
 
Two papers at the conference examined different aspects of policies designed to provide 
fiscal stimulus.  In the first of these papers, “Large Changes in Fiscal Policy: Taxes 
versus Spending,” Alberto Alesina and Silvia Ardagna use panel data on OECD countries from 1970 to 2007 to examine fiscal stimuli and fiscal adjustments.  In an important 
finding, the authors show that tax cuts are more likely to increase growth than spending 
increases.  They also show that fiscal adjustments based on spending cuts and no tax 
increases are more likely to reduce deficit-to-GDP and debt-to-GDP rations than fiscal 
adjustments based on tax increases.  Their findings differ from the predictions of a 
standard Keynesian model and underscore the important role for supply side impacts of 
fiscal policy, including the role of investment expenditures.   
 
In another paper on fiscal stimulus, “Household Response to the 2008 Tax rebates: 
Survey Evidence and Aggregate Implications,” Claudia Sahm, Matthew Shapiro and Joel 
Slemrod use survey evidence to examine how recipients of the 2008 tax rebates altered 
their behavior in response to the receipt of the rebate.  Among their many findings are 
that only one-fifth of respondents reported that the rebates led them to mostly increase 
spending, while over half said they would use it primarily to pay off debt.  Given that 
much of the rhetoric used to support this policy prior to its passage was that tax rebates 
targeted at the low end of the income distribution would be more stimulative than rebates 
aimed at higher earners, it is particularly interesting that the authors find that lower 
income individuals were less likely to report using the rebate for spending.  While the 
ultimate stimulus effect per dollar of rebate turned out to be modest, the fact that the 
aggregate rebate was large and distributed over a short period of time suggests that it had 
a non-trivial effect on total spending in the second and third quarters of 2008. 
 
The conference also included two papers examining policies targeted at individuals at the 
low-end of the income distribution.  In “Trends in the Level and Distribution of Income 
Support,” Karl Scholz and Robert Moffitt trace the substantial changes over the last 
quarter century in the relative importance of means-tested and social insurance programs.  
While they find that transfer program expenditures in total rose from 1984 to 2004, they 
also find that this increase was very unevenly spread across income and demographic 
groups.  For example, they show that rising Social Security retirement benefits, Social 
Security disability benefits, Supplemental Security Income and health programs have led 
to a large increase in expenditures on very poor elderly, disabled and childless families.  
At the same time, however, they found that very poor single parents and very poor two-
parent households experienced declines in expenditures.  They also find that one- and 
two-parent households further up the income scale experienced increases, largely due to 
the expansion of the Earned Income Tax Credit (EITC).  On net, they find substantial 
redistribution over time away from very poor one- and two-parent households and 
towards near-poor and non-poor one- and two-parent households as well as toward the 
elderly, disabled and childless.   
 
Bruce Meyer provided additional analysis of the EITC in his paper “The Effects of the 
EITC and Recent Reforms.”  After reviewing how the EITC operates and describing the 
characteristics of the recipients, this paper examines how the EITC affects poverty rates, 
the income distribution and labor supply.  He shows, for example, that in 2007 the EITC 
lifted just over 4.5 million people above the poverty line, reducing the overall poverty 
rate by 18 percent.  The paper also discusses several problems with the EITC, including 
the predicted negative effect on hours worked, complicated marriage incentives that encourage marriage for some and discourage it for others, and the issue of noncompliance 
(e.g., not paying taxes that are due).  He closes the paper by examining the likely effects 
of the American Recovery and Reinvestment Act of 2009.   
 
The final paper in this volume, by Mihir Desai, Dhammika Dharmapoula and Monica 
Singhal, is “Tax Incentives for Affordable Housing: The Low Income Housing Tax 
Credit.”  This program is a novel tax expenditure program that uses “investable” tax 
credits to incentivize the production of low-income rental housing.  In addition to 
explaining the complex structure of the program, the authors discuss that the program has 
grown into the largest sources of new affordable housing in the U.S.  In addition to 
providing new estimates of the magnitude of the tax expenditures on this program, the 
authors discuss how the program is priced as well as the efficiency and distributional 
aspects of the program.   
 
While NBER research papers do not make policy recommendations, the rigorous research 
on these and related topics is exceedingly relevant and informative for those in the 
policy-making community who do design, evaluate and implement policy.  The NBER 
looks forward to continuing its fruitful interactions with the policy community at future 
Tax Policy and the Economy conferences.   
 
 
 

Tax Policy and the Economy, Volume 24

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