Do tax increases reduce real GDP?

What will be an ideal response?

A study by economists Christina Romer and David Romer shows that most significant changes in taxes are motivated by four factors: counteracting other influences in the economy; paying for increases in government spending; addressing an inherited budget deficit; and promoting long-run growth. The authors suggest that the first two factors tend to be correlated to other factors affecting the economy and often generate unreliable results on the effect of taxes on GDP. These economists estimate, however, that tax changes made to stimulate long-run growth or to reduce an inhered budget deficit have a very large effect on GDP. In fact, their estimates of these last two tax changes suggest that a tax increase of 1 percent of GDP lowers real GDP by about 2 percent to 3 percent.