Charles Kadlec | Christina Romer Admits Tax Hikes Will Kill the Recovery

A powerful analysis by  President Barack Obama’s first Chair of his Council of Economic Advisers (CEA) indicates the President’s proposed tax increases would kill the economic recovery and throw nearly 1 million Americans out of work.  Those are the extraordinary implications of academic research by Christina D. Romer, who chaired the CEA from January 28, 2009 – September 3, 2010.  In a paper entitled: “The Macrcoeconomic Effects of Tax Changes” published by the prestigious American Economic Review in June 2010 (during her tenure at the White House), she stated: “In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.”

Although Dr. Romer’s analysis is full of equations and econometric jargon, the clarity of her conclusions are a fatal indictment of the Obama Administration’s demand for tax increases.  In what may be the first time since David Stockman’s “Trojan Horse” comment regarding the Reagan tax rate cuts, a high White House Official has completely undermined her own Administration’s policy while serving. Had this happened during a Republican administration, a la Stockman’s Atlantic interview, it would have been Page One news.  “Obama To America:  Drop Dead.”

The AER paper, co-authored with her husband and fellow UC Berkeley Professor, David H. Romer, examines the impact of tax increases and reductions on U.S. economic growth for the period 1945 to 2007.  One of the innovations in the paper is its focus on “exogenous” changes in taxes, that is changes in taxes that were meant to either increase the rate of economic growth (not simply offset a recession), such as the Kennedy, Reagan and Bush tax cuts, or to reduce the budget deficit, such as the Clinton tax increase.  Excluded were “endogenous” tax changes that were purely countercyclical, such as the 1975 tax rebates, or were used to “offset another factor that would tend to move output growth away from normal”, such as the tax increases to finance the Korean war and the introduction of the payroll tax to finance Medicare.

“The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary.  The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.”

Wow!  That’s about as strong a statement as you will ever read in a paper published in the AER.

 

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