Party minimum for economics

By Yuriy Gorodnichenko (UC Berkeley) and Tymofiy Mylovanov (University of Pittsburgh)

Forbes-Ukraine did a comprehensive analysis of what party programs mean for Ukraine’s economic development. As a part of Forbes’ effort to provide a more complete picture of what leading political parties want to achieve in the new parliament, Evgen Shpytko, Anna Kovalchuk, and Vitaliy Kravechenko asked a series of questions about the pressing issues for Ukraine.  In this post, we try to aggregate the responses and identify common themes. Here’s what we found.

1. Most parties believe in supply side economics, that is, stimulating economy through production rather than through demand. This is a type of Laffer curve. If tax rates are reduced, people and businesses will have stronger incentives to engage in economic activity. Based on work of one of the authors and other evidence, the supply side response could be weak in the short run. Parties should not ignore demand side approach, that is, stimulating economy through demand.
2. Most parties also believe in compliance response, that is, economic agents start to declare their true incomes in response to tax reform. The compliance response is likely to be stronger than the supply side. It is not clear, however, this margin (compliance) can help to get tax cuts self-financed.

continue reading