THE WELFARE EFFECTS OF TEMPORARY TAX CUTS AND SUBSIDIES: THEORY,ESTIMATION, AND APPLICATIONS

This article presents a tractable and intuitive theory on the welfare effects of temporary tax cuts and subsidies, fiscal policies that I generically term “holidays.” The Kaldor–Hicks efficiency effects are theoretically ambiguous, with competing pro‐ and anti‐efficiency effects on newly incentivized versus time‐shifted purchases. To rectify this ambiguity I derive expressions for the welfare effects that are consistent with constant elasticity assumptions and depend only upon readily and reliably observed information. To demonstrate the framework's broad applicability, I analyze two different policies: the 2009 Cash for Clunkers program and states' sales tax holidays. I estimate that both policies generated substantial deadweight loss. (JEL H21, H30, D91)