Macroeconomic Effects Of Tax Changes Research Articles

Household indebtedness and the macroeconomic effects of tax changes

This study investigates whether household indebtedness influences the macroeconomic effects of U.S. tax changes. By applying a state-dependent local projection method to the exogenous tax shock series, we find that a tax cut is more effective in stimulating output when the economy is characterized by higher household indebtedness. The household debt-dependent tax policy is primarily driven by (i) the response of private consumption, not private investment; (ii) changes in personal income tax, not corporate income tax, suggesting the relevance of a higher MPC of constrained households in understanding the documented state dependence. In response to a tax cut, labor supply also increases more during a high-debt state, which is consistent with the micro-level evidence on the labor supply of constrained households, thereby contributing to higher tax multipliers. Our findings are robust to a battery of sensitivity checks, especially controlling for the additional states of the economy considered in the literature.

Macroeconomic effects of tax rate and base changes: Evidence from fiscal consolidations

This paper examines the macroeconomic effects of tax changes during fiscal consolidations. We build a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected yield, motivation, and announcement and implementation dates of more than 2000 tax measures across 10 OECD countries. Using this data, we then analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further differentiating between changes in personal income, corporate income, and value added taxes. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.

Household Indebtedness and the Macroeconomic Effects of Tax Changes

Household Indebtedness and the Macroeconomic Effects of Tax Changes

Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations∗

This paper examines the macroeconomic effects of tax changes during fiscal consolidations. Webuild a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected revenue impact, motivation, and announcement and implementation dates of nearly 2,500 tax measures across 10 OECD countries. We analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further separating between changes in personal income, corporate income, and value added tax. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.

Macroeconomic Effects of the Anticipation and Implementation of Tax Changes in Germany: Evidence from a Narrative Account

This paper quantifies the dynamic macroeconomic effects of tax changes in Germany, allowing for anticipation effects of preannounced tax reforms. Identification is achieved using a narrative approach, which provides information about the timing of tax reforms. An anticipated cut in taxes has a positive effect on output with a peak multiplier of 1.7, not observed until nine quarters after implementation. This positive effect is accompanied by significant negative anticipation effects on output, consumption, investment, hours worked and wages. Our results suggest that policymakers should take anticipation effects into account when implementing fiscal policy measures.

Household Indebtedness and the Macroeconomic Effects of Tax Changes

This study is an attempt to investigate whether household indebtedness influences the macroeconomic effects of the U.S. tax policy. We apply a state-dependent local projection method to the exogenous tax shock series by Romer and Romer (2010) and find that a tax cut strongly stimulates the output when households are highly indebted. The expansionary effect of a tax cut in the period of high household debt is particularly significant for (i) consumption than investment; (ii) a personal income tax than a corporate income tax; (iii) during bad times than good times. These findings support household indebtedness as a measure of liquidity constraint for wealthy hand-to-mouth households at the macro-level. In response to a tax cut, households increase (decrease) labor supply when they are highly indebted (not indebted). This lack of a neoclassical wealth effect further contributes to an increase in the output. The state-dependent effects of tax policy, which influence the disposable income of the household directly, are more notable than those of the government spending policy, lending further support to the role of the household liquidity constraint channel of tax policy.

Macroeconomic effects of exogenous tax changes in a small open economy: narrative evidence from Croatia

ABSTRACT Following the Romer and Romer narrative approach (RR), this paper investigates the effects of tax changes (personal income tax and value added tax in particular) on economic activity in Croatia. We use the narrative approach to identify exogenous tax shocks and construct a unique time series of these shocks for the 2004–2019 period. However, as Croatia is a small open economy, we adjust the original RR modelling approach by taking into account the relevance of external (demand) shocks. Our results indicate that positive tax shocks lead to a fall in private consumption and output in the Keynesian manner. We show that, compared to direct taxes, indirect taxes exercise a stronger effect on macroeconomic aggregates, but the effect of direct taxes is statistically significant throughout the whole time horizon and does not fade out. As the main contributions of this paper to the existing literature, we highlight the following: firstly, this paper sets forth the first estimates of the macroeconomic effects of tax changes based on the narrative approach in the case of a developing economy; secondly, this study extends the original RR approach by including the effects of external shocks, making this approach more suitable for the analysis of fiscal policy in small open economies.

The macroeconomic effects of tax changes: Evidence using real-time data for the European Union

This paper examines the macroeconomic effects of tax changes in the European Union between 2000 and 2016. The novelty of our approach hinges on the use of real-time estimates of discretionary fiscal adjustments. In particular, exploiting a unique database covering anticipated and unanticipated tax changes, we provide the first narrative panel estimates of output and employment multipliers for tax changes. Our results suggest that medium-term revenue-based output multipliers are in the range of −1.1 to −1.9 for unanticipated tax changes. Preannounced changes, on the other hand, temporarily impact economic activity inversely upon announcement, resulting in a less than one-to-one change in ex post tax receipts, but portray up to one percentage point larger employment responses. Finally, we find evidence of asymmetry between the effects of revenue increasing and decreasing measures in the European Union.

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply

In this reply to a comment by Jentsch and Lunsford, we show that the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods. (JEL E23, E62, H24, H25, H31, H32)

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply to Jentsch and Lunsford

In this reply to a comment by Jentsch and Lunsford, we show that, when focusing on the relevant impulse responses, the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods.

State-Dependent Macroeconomic Effects of Tax Changes

State-Dependent Macroeconomic Effects of Tax Changes

A Quarterly Fiscal Database Fit for Macroeconomic Analysis

The study of the macroeconomic effects of tax changes and public spending plans has regained footing recently. Nevertheless, in many occasions, the shortcomings of available official data pose limits to the type of approach analysts can pursue. While this issue receives traditionally limited attention, it is of utmost relevance for policy makers and academics alike. Against this framework, in this paper we construct a quite disaggregated quarterly fiscal database of Spanish seasonallyadjusted public finance variables for the period 1986Q1-2015Q4, in national accounts terms. Following a recent strand of the literature, we pose special emphasis on the models and data ingredients used. The later includes a rich set of input fiscal data taken from budgetary accounts. We illustrate the use of our data by providing key stylized facts on the cyclical properties of fiscal policies over the past three decades.

Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations

This paper examines the macroeconomic effects of tax changes during fiscal consolidations. We build a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected revenue impact, motivation, and announcement and implementation dates of nearly 2,500 tax measures across 10 OECD countries. We analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further separating between changes in personal income, corporate income, and value added tax. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply to Jentsch and Lunsford

In this reply to a comment by Jentsch and Lunsford, we show that, when focusing on the relevant impulse responses, the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods.

The Near Term Growth Impact of the Tax Cuts and Jobs Act

This note uses existing empirical estimates of the macroeconomic effects of tax changes to project the near term impact of the Tax Cuts and Jobs Act on US GDP growth. Applying recent reduced form estimates of tax multipliers with the projected revenue impact of the Act yields a level of GDP that is predicted to be 1.3% higher by 2020, with most of the growth front-loaded in 2018. Accounting for the composition of the Act in terms of its individual and corporate provisions leads to a similar GDP increase by 2020, but with stronger growth in 2018 and a partial reversal in the following years. Accounting for the impact of TCJA on marginal individual tax rates raises the projected growth impact considerably, while accounting for the distribution of the tax changes across income groups suggests a more delayed positive impact on GDP. These projections are conditional on mean-reverting dynamics of future taxes that are estimated from postwar US data.

Discretionary Tax Changes and the Macroeconomy: New Narrative Evidence from the United Kingdom

This paper provides new estimates of the macroeconomic effects of tax changes using a new narrative dataset for the United Kingdom. Identification is achieved by isolating “exogenous” tax policy changes using the Romer and Romer narrative strategy. I find that a 1 percent cut in taxes increases GDP by 0.6 percent on impact and 2.5 percent over three years. The findings are remarkably similar to Romer and Romer narrative estimates for the United States, reinforcing the view that tax changes have powerful and persistent effects. “Exogenous” tax changes are also shown to have contributed to important episodes in the UK business cycle. (JEL E23, E32, E62, H20, H61)

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The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. (JEL E32, E62, H20, N12)