Revisiting the Narrative Approach of Estimating Tax Multipliers

Abstract

AbstractWe analyze whether popular measures of narrative tax shocks can be treated as relevant instruments for observable endogenous tax series of interest. We find that narrative tax measures are only weakly correlated with cyclically adjusted tax revenues for the US and the UK. Using weak‐instrument robust inference, narrative tax measures often yield insignificant estimates of tax multipliers. We conclude that the literature currently understates the uncertainty associated with estimating the tax multiplier using the narrative approach.