The Personal Tax Surcharge and Consumer Demand, 1968-70

Okun, Arthur M.
March 1971
Brookings Papers on Economic Activity;1971, Issue 1, p167
Academic Journal
This article estimates the extent to which consumption in the U. S. was directly curbed by the personal income tax surcharge from 1968 to 1970. The Revenue and Expenditure Control Act of 1968 provided for a surcharge of 10 percent on federal corporate income taxes, retroactive to January 1, 1968. The personal tax surcharge was enacted at a 10 percent rate, retroactive to April 1, 1968 and continuing to June 30, 1969. The payment of federal income taxes is recorded in the national income accounts at the time the taxpayer actually parts with cash, either through withholding or through payment of estimated or final installments. Among all the conceivable reasons that the surcharge could have had a significantly different impact from other cutbacks in the growth of disposable income, the most serious and most challenging is the permanent income hypothesis--the proposition that consumption is altered much less in response to changes in income that are viewed as transitory than in response to those viewed as permanent. The four models presented agree remarkably on the amount that the surcharge should have curbed consumption in accord with the full-effect view. The reputation of the personal tax surcharge may have been sullied by unreasonable expectations rather than inadequate accomplishments.


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