August 11, 2009

The one common theme in our analysis is that changes in policy will either result in a change in what we call income effects (shifts in aggregate demand) or substitution effects (movements along the demand curve). We question the effectiveness of the former, since one group’s gain would tend to be offset by another group’s loss. The shift in aggregate demand is like a zero sum game. In contrast, substitution effects or disincentives generated by tax rate changes are common to all.

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