EFFECTS OF TAXATION IN ECONOMIC-MODELS - A SURVEY

This paper surveys the effects of taxation in 18 economic models. It is shown how in the short run most models suggest a positive balanced budget multiplier as a result of a simultaneous increase in public spending and taxation, which is in line with the Keynesian Haavelmo effect. However, in the medium run this outcome changes drastically. Then, in the majority of the models surveyed, the Keynesian Haavelmo effect is no longer valid; instead we have an inverted Haavelmo effect ie a negative balanced budget multiplier, which can be seen as a theoretical and empirical basis for tax cuts as advocated by supply-side economics.