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28 Oct 2009 03:19 pm

Taxes As Stimulus?

Bruce Bartlett has been arguing that at VAT could be stimulative:

Suppose you had a 10 percent VAT and we said we weren't going to collect it for the next 10 months. People would buy like crazy. They'd buy toilet paper, they'd buy anything they could get their hands on that they knew they'd need in the future.

Free Exchange isn't so sure:

Would the imminent imposition of a tax on consumption produce a wave of buying now? I'm not sure. On the one hand, we have seen that the introduction of a temporary subsidy can boost spending; Cash for Clunkers and the housing tax credit appear to have demonstrated that. On the other hand, those subisidies represented a temporary boost to income, while permanent income stayed the same as it was before the subsidies were available. But a VAT would (presumably) be around for ever, and would mean a forever reduction in disposable income. This would lead consumers to reduce spending as soon as they learned about the increase; it would have a contractionary effect, rather than a stimulative effect.

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