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101 IRET Policy Bulletin 1 (2011)

handle is hein.taxfoundation/iretpbul0060 and id is 1 raw text is: _ _ _ _ _ _ _November 1, 2011 No. 101 THE NIXON, FORD, AND CARTER ERA TAX POLICIES Introduction This paper estimates the effect of the Nixon, Ford, and Carter era tax policies on the U.S. economy and the federal budget. It seeks to explain why the tax cuts during the 1969-1980 period had a mixed record in improving the performance of the economy, and how the tax system interacted with inflation to undermine the growth of investment and wages. The study utilizes a model driven by the impact of marginal tax rate changes on incentives to work, save, and invest. This approach can distinguish tax changes that make it more rewarding to produce goods and services from tax changes that merely throw money from the top of the Washington Monument. The incentives approach is consistent with how labor and capital markets and the production process operate in the real world. It is also consistent with the analytical methods taught in business schools to the people who decide how much and what type of capital to create. This is in contrast to Keynesian models which focus mainly on the dollar amount of a tax change, under the erroneous assumption that taxes affect the economy by altering disposable income and aggregate demand, and that the form of the tax and its impact on the supplies of labor, capital, and output are irrelevant. In practice, initial Keynesian demand effects of a tax change are offset by changes in federal borrowing or spending, leaving only the incentive effects of the tax change, if any, to alter behavior. A more complete description of the model and the economics behind at can be found in the appendix to the first paper in this series, The Economic Effects of the Kennedy and Johnson Tax Policies.1 1 See Stephen J. Entin, Economic Consequences Of The Tax Policies Of The Kennedy And Johnson Administrations, IRETPolicy Bulletin, No. 99, September 6,2011, available at http://iret.org/pub/BLTN-99.PDF. Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the market economy. 1710 Rhode Island Avenue, N.W., 11th Floor • Washington, D.C. 20036 (202) 463-1400 - Fax (202) 463-6199 • Internet www.iret.org

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