The Effect of Tax Expenditures on Automatic Stabilizers: Methods and Evidence

We study the effect of tax expenditures on the stabilizing power of the tax system. We propose a micro-simulation strategy that exploits links that we identify between automatic stabilizers, tax expenditures, and effective marginal tax rates. Using U.S. tax return micro data from 2000 to 2010, we estimate that, on average, the mortgage interest deduction and the charitable contributions deduction decreased the ability of the tax system to absorb fluctuations in aggregate consumption by an average of 7.4 percent and 3.9 percent, respectively.