Date: 16th of November 2017
Place: Room 3001
Axelle FERRIERE (European University Institute, Florence) – “The Heterogeneous Effects of Government Spending: It’s All About Taxes” with Gaston NAVARRO
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 show that this finding can be rationalized in a heterogeneous households model with indivisible labor. A central implication of the model is that higher-income workers are less responsive to changes in taxes than lower-income ones. Consequently, a spending increase financed with more progressive taxes induces a smaller crowding-out. Finally, we analyze tax revenue data on households income to provide evidence of our mechanism at the micro level.