Taxes are included in the GDP income method, which is why taxing even air (even if free) would increase GDP. The OECD defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs).”

> Taxes are included in the GDP income method, which is why taxing even air (even if free) would increase GDP. The OECD defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs).”

GDP is composed of four components. One of those components is government spending, which can be negative (ie, taxes) or positive (subsidies or direct purchasing).

However, government spending doesn't come from nowhere (no, even if the money is printed or issued as debt). A change in government spending is always matched by an equivalent change in consumption, investments, and/or net exports, which are the source of that money.

The secondary effects of tax policies may be to ultimately change the shape of aggregate supply or aggregate demand functions (at least, that's the argument for doing so), but taxation does not directly have any effect on GDP.

So no, taxing air would not increase the GDP.

I mispoke; GDP == taxable transactions. If it was taxable (privatized), it would increase the GDP, whereas if not (as if the government performed and didnt tax it), it would not increase the GDP.

> I mispoke; GDP == taxable transactions.

That's an oversimplification that honestly provides a more confusing definition than the real one, which is that GDP is the sum of consumption, investment, government spending (which can be negative) and net exports.

> If it was taxable (privatized), it would increase the GDP, whereas if not (as if the government performed and didnt tax it), it would not increase the GDP.

No. Whether a service is performed by the private or public sector has no bearing on how much it counts towards GDP.

Thanks you for the reply. Your rigid definition of GDP is only one of many models. GDP(I) and GDP are similar and should be exact but because of statistical and measurement defects, they are not. But GDP(I) does in fact use taxes. I understand (grossly) that to make GDP(I) == GDP, you add taxes to GDP. Regardless, GDP can be modeled in several ways according to the US Bureau of Economic Analysis. If a government decides to not tax air, no economic activity. If they do, and a company sells you taxable air, there is economic activity. In the former case, it no money is required. In the latter, it generates economic activity, activity that cannot be swept under the rug and must be measured. It does matter, gov vs private industry.

> Your rigid definition of GDP is only one of many models. But GDP(I) does in fact use taxes. I understand (grossly) that to make GDP(I) == GDP, you add taxes to GDP. Regardless, GDP can be modeled in several ways according to the US Bureau of Economic Analysis.

GDP can be measured in several ways. In a perfectly observable system, all the measurements would be exactly equal. They are not different models and they do not represent different underlying concepts. It is wrong to say that taxes are included in one measurement of GDP and not the other. In some methods, they are measured directly, and in others, they are measured indirectly. In both cases, taxes have the same effect.

> If a government decides to not tax air, no economic activity. If they do, and a company sells you taxable air, there is economic activity. In the former case, it no money is required. In the latter, it generates economic activity, activity that cannot be swept under the rug and must be measured.

Your usage of "economic activity" isn't really well-defined. But the difference between the two situations you're describing is that, in one, air is free, and in the other, air is being sold. The fact that it's being taxed on top of the sale is irrelevant.

This is also a really pointless example because air is mostly a non-excludable resource, so talking about either "selling" it or "taxing" doesn't reveal anything meaningful.

> It does matter, gov vs private industry.

No, it does not. Taxation doesn't come from nowhere. From a macroeconomics perspective, the government isn't "special".

Let me try one last time: Remember when I said that GDP = consumption + investment + government expenditures + net exports? Some economists would instead say that GDP is really "just" consumption + investment + net exports. And guess what? Regardless of which school of thought you subscribe to, the end result is exactly the same. It doesn't matter whether you break out government expenditures separately from consumption, investment, and net exports or whether you include government consumption in "consumption", government investment in "investment" and so on. The end result is exactly the same.

Surprised you're getting downvoted.

It's true, if the gov't performs a service, it's included in GDP. And no, taxes don't increase GDP.

The OECD defines GDP income method as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs).”

I understand GDP as "taxable transactions".