How Taxes Affect Economic Behavior

By Henry J. Aaron; Joseph A. Pechman | Go to book overview
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Introduction and Summary

TAXES divert resources from private to public use. But they also influence how private agents use resources, and Congress has used the tax laws aggressively to influence private behavior. The study of the intended and unintended effects of taxes on private consumption, investment, financial structure, and labor supply has been a major preoccupation of public finance economists for decades. For many years the public seemed to be interested more in the way taxes affect the level of economic activity than in how they influence the character of that activity. But popular attention is increasingly being devoted to a subject that has long absorbed the economics profession--how taxes affect the supply and allocation of resources.

The papers in this volume report on the state of economic research into the effects of taxes on labor supply, business equipment investment, corporate financial structure, the prices of common stock, capital gains, housing investment and prices, saving, and charitable giving. They do not purport to encompass all the ways taxes influence economic behavior. Nor do they tie together in a single framework the simultaneous influence of taxes on decisions that in fact influence one another. The difficult problem of relating the simultaneous effect of taxes on each of these important aspects of economic behavior must still be solved. But these papers do report important areas of progress in identifying the economic effects of taxes and they suggest how our understanding can be further improved.

Labor Supply

Taxes on labor income raise more than half of all federal revenues. They are among the more prominent instruments of income redistribu


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