Events at CERGE-EI

Axelle Ferriere, Ph.D.

European University Institute, San Domenico di Fiesole, Italy

Author: Axelle Ferriere

Abstract: How expansionary is government spending? We revisit this classic question by taking into account the distribution across households of taxes used to finance the spending. Using US data since 1913, we provide evidence that spending multipliers are larger when financed with more progressive taxes. Then, we develop a heterogeneous-household model with indivisible labor that can rationalize this finding. A central implication of the model is that higher-income workers are less responsive to changes in taxes. Consequently, a spending increase financed with more progressive taxes induces a smaller crowding-out: multipliers are raised by 0.8 when only the top-25% higher-income workers finance the spending shock. Finally, we analyze tax revenue data on households’ income to provide evidence of our mechanism at the micro level.

Full Text:  “The Heterogeneous Effects of Government Spending: It’s All About Taxes.”