Do temporary tax increases slow a states economic recovery?
Because state governments are required to balance their operating budgets,* revenue shortfall must lead to either reduced expenditures or increased taxes. A number of leading economists have concluded that temporary tax increases will not slow a states economic recovery. Peter Orszag and Joseph Stiglitz (recipient of the 2001 Nobel Prize in Economics) argue that in the short run (the period of concern during a recovery), a tax increase may do less harm to the economy than a government spending reduction of the same amount. During a recovery, the economy needs stimulation. Both private spending and government spending stimulate the economy. In the short run, however, public spending out of a tax increase generally is higher than the private spending that occurs if money is left in taxpayers pockets. If taxes are not increased, taxpayers will save a portion of that income and will spend some of it out of state (e.g., mail-order purchases, out-of-state travel). If taxes are increased, on
