Income Taxes and the Income Velocity of Money: An Empirical Analysis

Document Type

Article

Language

eng

Format of Original

13 p.

Publication Date

Fall 1985

Publisher

Elsevier

Source Publication

Journal of Macroeconomics

Source ISSN

0164-0704

Abstract

From 1981iv to 1983ii, the growth rate of the income velocity of money declined sharply. Almost all forecasts of this rate based on standard models overpredicted the velocity growth rate over this period. In this paper it is argued that income taxes exert a direct and discernible influence on velocity of money which has not been recognized by these models. As a result, most models failed to capture the 1981–1983 Reagan tax cuts and, consequently, overpredicted the velocity growth rate in this period. It is shown that the tax-velocity hypothesis is supported by the results of an empirical test. It is also shown that the inclusion of taxes in a model of velocity helps alleviate the overprediction of the velocity growth rate in the 1981–1983 period.

Comments

Journal of Macroeconomics, Vol. 7, No. 4 (Fall 1985): 523-535. DOI.

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