Tax Multipliers Research Articles

Regional economic impact of university research expenditures

ABSTRACT Governments around the world provide significant funds for research activities at higher education institutions. Despite universities’ increased emphasis on external research funds and increased national funding for university research, little is known about the economic impacts specific to research expenditures. We use IMPLAN, an input-output model, to analyze the local economic impacts of externally sponsored university research expenditures in two geographic areas using a technological university in the Midwestern United States as a case study. For the rural micropolitan area, we find that one million dollars in university external research expenditures is associated with $711,000 in value added, 10 jobs, and $159,000 in tax revenue. The effects per million dollars of expenditures are typically larger in the medium metropolitan area; one million dollars in university external research expenditures is associated with $945,000 in value added, 9 jobs, and $164,000 in tax revenue. We also estimate value added, employment, and tax multipliers of 1.67, 1.86, and 1.74 for the micropolitan area and 2.02, 2.25, and 2.09 in the medium metropolitan area. Last, we show that 15-18% of generated tax revenue goes to the state and 75–77% goes to the federal government. Our results highlight the local and statewide economic returns to national public policy to invest in university research activities and how characteristics of the local economy influence the magnitude of those returns. The variation in the impacts also suggests that policy makers should be aware of differences across both geographic areas and impact measures (e.g. employment versus output).

The Optimal Tax Structure from GDP-growth Perspective

The tax multiplier in macroeconomics assumes a negative relationship between the volume of tax revenue in a country and its GDP. However, it may also be relevant to GDP growth whether the same volume of tax burden is levied in a different structure. Can the fiscal government stimulate the GDP growth by restructuring the tax revenues? The following study analyses the linkage between GDP growth rate and the structure of tax revenues. A database contains data from 25 EU countries which are open economies in the European single market. The period starts in 1996 and lasts until 2018. The Eurostat classification is used for tax types. Dynamic GMM tests are applied for GDP equations based on expenditure and output approach and extended with taxation category determinants. The conclusions are that tax structure based on consumer taxes on production and income tax can support the economic growth, meanwhile higher weight of social contribution is a destructive factor for income expansion. The policy recommendation is to reweight the tax structure toward indirect taxes from direct taxes if economic growth is a preference in the tax system in a trade-oriented open economy. Novelty of the research: Application of Arellano-Bond version of Dynamic GMM test, comparable results for Solow-Swan and augmented Cobb-Douglas approaches, the composition of database, the falsification and verification of statements of the existing literature.

Do local governments tax homeowner communities differently?

AbstractThis article investigates whether and how strongly the share of homeowners in a community affects residential property taxation by local governments. Different from renters, homeowners bear the full property tax burden, irrespective of local market conditions, and the tax is more salient to them. “Homeowner communities” may hence oppose high property taxes in order to protect their housing wealth. By merging granular spatial data from a complete housing inventory in the 2011 German Census with historical homeownership rates and housing damages during the Second World War as sources of exogenous variation in local homeownership, we provide empirical evidence that otherwise identical jurisdictions charge significantly lower property taxes when the share of homeowners in their population is higher. This result is invariant to local market conditions, which suggests tax salience is the key mechanism behind this effect. Moreover, we find positive spatial dependence on tax multipliers, indicative of property tax mimicking by local governments.

The Consequences of Tax Changes: The Evidence on Tax Multiplier in Russia

The information about tax changes’ effects on aggregate output is highly important for economic policy, especially in times of economic contractions. Russian economy underwent the series of tax changes during 2003–2020. For better tax policy design, it is necessary to understand and to evaluate the effects of this changes on aggregate output, which is the purpose of this study. To solve the problem of endogeneity we use two methods– “narrative approach” and “classical” approach. The first one uses data on exogenous, not driven by economic conditions, tax changes from official documents and forecasts. The second one uses cyclical component of the aggregate tax receipts as tax shocks indicator. Using both methods we estimated a VAR model of Russian economy for period 2003–2020. The implementation of “narrative approach” did not provide any significant effect possibly due to vulnerability towards the measurement error. Based on the classic approach we found that tax changes affect output with a 1-year lag and a 1 percentage point shock of aggregate tax receipts to GDP ratio lowers output growth by 0.7–0.88 percentage points. This result is robust to inclusion of additional factors in the model. The results are mostly consistent with existing research. Implementation of “narrative approach” proved to be restricted in Russia. “Classical” approach allows to conclude that tax changes could serve as an appropriate tool of countercyclical policy in Russia. On the other hand, increasing tax burden in times of downturn could be highly harmful for recovery. These results should be interpreted taken into consideration the limitations of the VAR method used.

Estimating tax and government spending multipliers in China

ABSTRACT In recent years, China has implemented unprecedented fiscal policies, prompting crucial questions: are tax cuts effective in stimulating output and is the output effect from tax cuts greater than government spending in developing countries? This article addresses this ambiguity by providing a novel method to identify China’s tax and government spending shocks in a SVAR framework. The results show that both tax cuts and increased government spending positively impact output. The estimated tax multiplier is 2.4 (3.6) after 8 (20) quarters while the government spending multipliers are 0.3 (0.8), suggesting that tax cuts have a greater impact on output than government spending. The results above survive after a set of robustness checks. The findings contribute to the ongoing debate on the effectiveness of fiscal policy tools in developing economies and suggest that targeted tax measures could be a potent instrument for stimulating economic activity.

When are tax multipliers large?

I show that the US tax multiplier depends on the direction of the tax change. The tax multiplier is significantly larger (in absolute value) for tax hikes than for tax cuts – regardless of whether I identify tax shocks via (i) the narrative approach or (ii) sign restrictions. The tax hike multiplier is strongly pro-cyclical, i.e., substantially larger in expansions. Variation in the tax cut multiplier over the business cycle is milder and statistically insignificant. A simple business cycle model with downward nominal wage rigidities can explain these results.

Taxes and Growth: New Narrative Evidence from Interwar Britain

Abstract The impact of fiscal policy on economic activity is still a matter of great debate. And, ever since Keynes first commented on it, interwar Britain, 1918–39, has remained a particularly interesting and contentious case—not least because of its high-debt environment and turbulent business cycle. This debate has often focused on the effects of government spending, but little is known about the effects of tax changes. In fact, a number of tax reforms in the period focused on long-term and social objectives, often reflecting the personality of British Chancellors. Based on extensive historiographical research, we apply a narrative approach to the interwar period in Britain and isolate a new series of exogenous tax changes. We find that tax changes have a sizable effect on GDP, with multipliers exceeding 2 within two years. Our estimates provide new evidence on the effects of tax changes, contribute to the historical debate about fiscal policy in the interwar period and are also consistent with the sizable tax multipliers found after World War II.

The macroeconomic effects of business tax cuts with debt financing and accelerated depreciation

This paper studies the macroeconomic effects of business tax cuts using a dynamic general equilibrium model that incorporates endogenous debt and equity financing, interest deductibility, and accelerated capital depreciation. A cut in the tax rate stimulates business investment and output persistently, but the size of the effects is small. On impact, a ten percentage point permanent tax cut raises investment and output by 2 percent and 0.4 percent, respectively. The cumulative tax multiplier ranges from −0.4 in the initial year to −0.6 after ten years. The model would predict more expansionary effects without debt financing and accelerated depreciation. The multiplier of investment tax credits is larger in absolute value than the tax rate multiplier. The multiplier of depreciation allowances is much smaller on impact than at long horizons.

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.

A new method for measuring eco-efficiency

Current methods available to calculate eco-efficiency require a sample of products and are not applicable for one product only. Furthermore, the methods require a weighting process. Thus, they contain subjectivity, or it is possible that the weighting factors' values do not match stakeholders' values. This paper proposes a new method of measuring the eco-efficiency ratio. The numerator is the contribution of a product's life cycle to the economy, and the denominator is the economic burden caused by a product's life cycle. The economic contribution is calculated using the input-output method. The economic burden is calculated by estimating the health damage caused by pollutant emissions over a product's life cycle. The damage is expressed in Disability Adjusted Life Years (DALY) and is valued using the human capital approach. The applicability of the proposed method is presented by calculating the eco-efficiency of electricity generations in Indonesia. The proposed method shows that the eco-efficiency ratio of a product depends on the income and tax multiplier, supply chain process efficiency, value of the product, GDP per capita, and the level of emissions. The proposed method enhances the decision-making process because it is more straightforward, free from subjectivity, and applicable for one product only.

Teaching the COVID-19 lockdown using the Keynesian Cross

I present a framework to teach the macroeconomic effects of COVID-19 using the Keynesian Cross. I show that the rest of the economy suffers from a decline in demand once one sector of the economy is shut down and that the government spending and tax multipliers are smaller than usual. Fully insuring workers in the sector that is shut down cannot prevent a recession, but for the same aggregate transfers, such targeted income transfers do more to restore aggregate output than unconditional transfers. An extension to the I S curve shows that a lockdown results in deflation. These insights can be taught in an introductory or intermediate macroeconomics course.

Decentralization and Progressive Taxation

The traditional literature on fiscal federalism prescribes centralization of redistributive tasks to avoid welfare- or tax-induced migration. More recent work shows that even if the redistributive part of taxation, namely progressivity, is set by an upper-layer government and lower-layer governments only compete via a tax multiplier, income sorting can flatten effective tax progressivity. We argue that upper-layer governments anticipate the impact of local income sorting and strategically adjust their statutory tax schedules. The mobility of the income tax base sets limits to such strategic behavior. We apply causal machine learning methods to identify the effects of decentralization on the statutory tax structure in Switzerland. More decentralized cantons implement more redistributive statutory tax schedules for the least-mobile household types.

Emigration and fiscal austerity in a depression

What is the role of emigration in a deep recession when the government implements fiscal consolidation? To answer this question, we build a small open economy New Keynesian model with matching frictions and emigration. In simulations for the Greek Depression, fiscal austerity accounts for almost 1/3 of the GDP decline and 12% of emigration. A no-migration scenario under-predicts the bust in output by 1/6 and the rise in the debt-to-GDP ratio by 8 percentage points. The link between emigration and austerity is bi-directional. Emigration increases the labour tax hike and time required to reduce the debt ratio due to endogenous revenue leakage. In turn, tax hikes intensify emigration, while unproductive government spending cuts have a mild, ambiguous impact as they exhibit opposite demand and wealth effects. However, productive spending cuts display a fiscal multiplier above one, which incentivizes emigration. Emigration then amplifies the productive spending multiplier through internal demand. Similarly, the cumulative labour tax multiplier after five years rises from 0.86 without migration to 1.27 when the unemployed emigrate and 1.47 when both the unemployed and the employed emigrate.

State dependence of fiscal multipliers: the source of fluctuations matters

We develop a general theory of state-dependent fiscal multipliers in a framework featuring two empirically relevant frictions: idle capacity and unsatisfied demand. Our key novel finding is that the source of fluctuations determines the cyclicality of multipliers. Policies that stimulate demand, such as government spending, have multipliers that are large in demand-driven recessions, but small and possibly negative in supply-driven downturns. Conversely, policies that boost supply, such as cuts in payroll taxes, are ineffective in demand-driven recessions, but powerful if the downturn is supply-driven. Austerity, implemented by a reduction in government consumption, can be the policy with the largest multiplier in supply-side recessions and demand-driven booms, provided elasticities of labor demand and supply are sufficiently low. We obtain model-free empirical support for our predictions by developing a novel econometric specification that allows to estimate spending and tax multipliers in recessions and expansions, conditional on those being either demand- or supply-driven.

Are Fiscal Multipliers Estimated with Proxy‐SVARs Robust?*

AbstractWe estimate government spending and tax multipliers in the United States via a flexible proxy‐SVAR model, where identification is achieved by combining fiscal and non‐fiscal instruments with additional parametric restrictions. We find that, while the spending multiplier is robustly estimated to be larger than one across different models, the estimate of the tax multiplier is sensitive to the combination of instruments that we use. We unveil that the key factor behind these heterogeneous estimates is the assumption of orthogonality between total factor productivity (our main non‐fiscal proxy) and the tax shock. If this assumption is imposed, the tax multiplier is around one. If it is not imposed, the tax multiplier is three times as large. Our results point to the need of accounting for the large uncertainty surrounding the tax multiplier for the design of optimal fiscal policies.

Regime-dependent environmental tax multipliers: evidence from 75 countries

ABSTRACT This paper reviews the main transmission channels of an environmental tax reform shifting the tax burden from labour to carbon emission. The analysis uses a simple open-economy macro model and estimates dynamic environmental tax as well as personal income tax multiplier effects on output and employment for a panel of 75 high- and low-income countries from 1994 to 2018. Tax policy changes are identified by cyclically adjusting the tax revenues. The estimated environmental tax multiplier effects on output range from 1 on impact to 1.8 at the peak. Personal income tax multipliers are slightly higher, ranging from 1.4 to 2.3. While income taxes reduce employment, environmental taxes do not. Environmental tax multipliers are highly regime dependent: they are close to zero or statistically insignificant unless taxes are increased when output contracts, fuel prices are high, the environmental tax levels are high, or the carbon intensity of output is low. Commodity trade-exposed countries face higher tax multipliers. This analysis concludes that, compared with income taxes, environmental taxes can be a less contractionary source of revenues to support the post-COVID-19 fiscal consolidation efforts, especially in countries that are at the beginning of their decarbonization efforts.

Housing tax expenditures and financial intermediation

AbstractThrough the lens of a multi‐agent dynamic general equilibrium model, we examine the effects of changes in preferential housing‐related tax treatments on macroeconomic aggregates and welfare. Our first finding is that financial frictions on banks contribute to lowering tax multipliers. The multipliers that we find are smaller over a horizon of 20 quarters—they range from to , while the long‐run tax multipliers range from to . We then find that the reduction in the deduction of mortgage interest payments delivers the lowest long‐run multiplier. We also implement revenue‐neutral tax reforms and find that the repeal of mortgage deductibility is the best housing tax policy because it generates small losses in output.

Do we reject restrictions identifying fiscal shocks? identification based on non-Gaussian innovations

This paper is devoted to fiscal shock identification based on the assumption of non-Gaussianity of the errors, which can be easily tested. We use additional co-kurtosis conditions in GMM estimation of the AB-model to estimate the dynamic effects of fiscal shocks and find fiscal multipliers in the U.S. economy. Our approach results in higher tax multipliers on average relative to Blanchard and Perotti (2002) and Leeper et al. (2013). Testing the restrictions, we are not able to reject them in the Blanchard and Perotti (2002) model. Once we control for fiscal foresight, we can reject restrictions both individually and altogether. Finally, comparing elasticities of tax revenue to output to elasticities found in the literature, rejecting most of them, we are not able to reject the one of Caldara and Kamps (2017).

Quantifying multipliers in Italy: does fiscal policy composition matter?

Abstract This article aims to estimate fiscal multipliers in Italy by assessing the effect of an increase in government expenditure and taxes on the Gross Domestic Product (GDP). By applying structural vector autoregressive modelling to Italian quarterly data for the 1995–2019 period, I show that expansionary fiscal policies produce positive effects on the GDP level. Estimated spending multipliers are higher than 1, and when government investment and consumption are compared, findings show that government investment has a larger effect on GDP than government consumption. Estimated tax multipliers are lower than 1, and tax-based policies are less effective in stimulating GDP than expenditure-based fiscal plans. My findings strongly support the Keynesian perspective and indicate that Italy should increase public investments considerably in order to foster economic growth.

Fiscal multipliers in a small open economy: the case of Austria

Abstract We estimate fiscal multipliers for Austria in a framework of model uncertainty emanating from the choice of a particular econometric model. We present a comprehensive framework that allows to assess the effects of different multiplier definitions and choices related to the data, the model employed, and further technical choices associated with the specification of the model exert on fiscal multiplier estimates. The mean present-value government spending multiplier over all models entertained, based on around 3,000 estimates, is 0.68. Estimates of the peak spending multiplier for Austria tend to be larger than present-value spending multipliers, with a mean value of 0.85. The magnitude of the present-value tax multiplier is relatively high, with an average value across specifications of −1.12 and the mean peak tax multiplier is −0.54 for all specifications used.