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policy issues generate more controversy among analysts and
policymakers than the economic effects of tax cuts and increases
in government spending. These core fiscal policy questions are
nearly always at the forefront of the policy debate, but that is
especially the case today because of the looming “fiscal cliff”
of $600 billion in tax increases and spending cuts set to take
effect at the end of the year. Judging the economic impact of
the fiscal cliff depends on core assumptions about the impact
that taxes and government spending have on economic aggregates.
As is obvious to anyone who’s been watching economic policy
debates over the past several decades, these assumptions differ
greatly between policymakers and analysts. The two assumptions
of greatest relevance for measuring the economic impact of
fiscal policy are the “multiplier” on government spending and
the “supply side” or substitution effects associated with
marginal tax rate reductions