Taxes and the Depression

http://www.futureofcapitalism.com/2010/12/taxes-and-the-depression-1

An official at the Federal Reserve Bank of Minneapolis, Ellen McGrattan, has published a new paper explaining how tax increases helped cause the Great Depression:

Many theories have been proposed for the large contraction of the 1930s and the slow recovery thereafter. Absent in the theories of [Milton] Friedman and Schwartz (1963), [Ben] Bernanke and Gertler (1989), Cole and Ohanian (2004), and many others is any role for fiscal policy in this decade. This paper challenges the conventional view that fiscal policy played little or no role. Tax rates on dividends rose significantly during the decade and, when fed into the basic growth model, imply a large drop in tangible investments and equity values. In the later part of the 1930s, tax rates on undistributed profits were introduced and led to another dramatic decline in tangible investment.

An abstract of the paper is available from the National Bureau of Economic Research, and the full text of a version of it is available from the Web site of the Minneapolis Fed.

by Ira Stoll  |  Dec 13, 2010 at 8:42 am Related Topics:  Federal Reserve, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list