A General Approach to Macroeconomic Policy by J. O. N. Perkins (auth.)

By J. O. N. Perkins (auth.)

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The simulations of cuts in employers' national insurance contributions provide evidence from three of the models that this form of stimulus also operates in a helpful direction on both of the main macroeconomic objectives (in one of them even better than a cut in VAT) - a conclusion that we shall see below is also consistent with the EEC simulations. In one model income tax cuts also reduce prices. When the fiscal stimuli are both accommodated by a sufficiently expansionary monetary policy to hold interest rates constant, the evidence from the UK models is mixed on whether government outlays are more inflationary than income tax cuts; though on the average of the models these results are consistent with the results from the OECD simulations to the effect that the income tax cut is the less inflationary of the two.

If the end of the period is the main consideration, this prescription would hold good for the US with income tax cuts, whether interest rates or the quantity of money is held constant, but with increases in government outlays it holds good only if interest rates are kept constant: but it would hold good for West Germany only with tax cuts, and not at all for Japan. The prescription of simultaneously cutting government outlays and income tax rates, with money held constant, holds good, however, for all seven countries and irrespective of whether one is most interested in the effect over the average of the five years or the effect at the end of the period, and whether the interest rates or the quantity of money is held constant except for outlays in the US, on one measure.

For if a rise in indirect taxes tends to raise prices, whereas a rise in income tax rates tends to reduce prices (as is suggested by almost all the evidence in Chapter 3), this means that a shift from direct to indirect taxes will tend to raise the price level on two counts: for the rise in indirect taxes will increase prices, as will also the reduction in direct taxes. If there are any two-bird instruments, it is obviously very important to know of their existence: for if any such instrument is moved in the wrong direction it can clearly both increase prices and reduce real output.

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