This is a pointless follow up post to this post which got some attention. As suggested by New Keynesian models, the old post considered G — government consumption plus investment. Here I am going to look at total expenditures (including transfers) and total revenues. Also I will consider only the Federal Government (due to FRED incompetence).
There were two dramatic apparently exogenous shifts in Federal Government revenues. First the ARRA (stimulus) 2009q1 included tax cuts and second the fiscal cliff 2013q1 a caused large revenue increase even when reduced from the huge scheduled cliff. GDP Growth did not slow in 2013. This absense of evidence corresponds to Ricardian equivalence and new as opposed to old Keynesian models.
The figure below shows Federal Government Revenues divided by the GDP deflator in 2009 dollars.
I would be eager to argue that the 2013 tax increases were taken from the rich and that this explains the apparent absense of an effect on GDP growth. However, this is not entirely true. They included the expiration of the partial payroll tax holliday with a tax increase of 2% of wage and salary income up to the FICA ceiling. The other increases were focused on high incomes (or large inheritances).
The pattern of consumption and personal disposable income was unusual. Personal disposable income declined sharply due to the tax increases, but consumption continued to grow smoothly.
Grcons is the growth rate of real consumption, and Grinc is the growth rate of real disposable personal income:
Here are the time series:
I think the second figure suggests that some of the shift was due to strategic income shifting with high income declared just before the tax increases. This helps explain the absense of correlation with consumption. Tax increases on people with high incomes (and those who just inherited large estates) would not be expected to have a large effect on consumption. The absense of an apparent effect of the end of the partial payroll tax holliday is puzzling to the Paleo Keynesian who is typing.
