Updates from Chicago Booth

How sales taxes could boost economic growth
By Dee Gill – The fight against sluggish global economic growth has been expensive, protracted, and unexpectedly vexing, leaving central bankers in developed economies with a laundry list of shared frustrations. Meager economic growth, flagging wages, and low inflation persist, in spite of bankers’ monetary stimuli, and threaten to quash upward mobility for young job seekers and midcareer employees in even the richest countries.

There’s a poster child for what countries do not want to become: Japan. The former economic powerhouse has been stuck in low-growth purgatory since 1991. And yet, as much as they’d like to avoid it, some countries have been sliding in that direction.

Many big economies are stagnating, and economists are running out of options to fix them. The conventional monetary policy for encouraging spending has been to drop short-term interest rates. But with rates already near, at, or below zero, that method is all but exhausted. Some economists have also started to empirically and theoretically question the power of forward guidance, in which central banks publicize plans for future interest-rate policies, at the zero lower bound.

Central banks and governments badly need a new stimulus tool, preferably one that doesn’t cost a lot of money. Some researchers are proposing a fix that might sound unappetizing: raising sales taxes as a means of jump-starting economic growth.

Francesco D’Acunto of the University of Maryland, Daniel Hoang of Germany’s Karlsruhe Institute of Technology, and Chicago Booth’s Michael Weber find evidence that a preannounced tax hike—a 3-percentage-point increase in Germany’s Value Added Tax enacted in 2007—provided just the kind of growth stimulus central banks desperately need today. more>

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