A macroeconomic analysis of sales and payroll tax cuts

This paper analyzes the short-run impact of sales and payroll tax cuts in a complete macroeconomic model which explicitly involves the government financing constraint. Sales and payroll tax cuts have been stressed as good measures for achieving once-for-all price level reductions. We demonstrate that in quite plausible circumstances, cuts in these taxes (financed by an increase in the personal tax rate) result in the price level increasing, not decreasing. Also, it is shown that a policy package involving a wage subsidy and a profits tax hike must involve employment and investment moving in the same, not the opposite, direction.