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

Abstract

This paper investigates the impact of changes in the level of taxation on economic activity. We use the narrative record --presidential speeches, executive-branch documents, and Congressional reports --to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate 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. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

Macroeconomic Structural Change in Indonesia: in The Period of 1990 to 2011

“…Reference [11] and [12] finds that the fiscal stimulus of 1 percent of GDP result in increased GDP by almost 1 percentage point and as much as 2 to 3 percent of GDP at the peak effect occurs, a few years later.…”

Política Fiscal Em Perspectiva: O Ciclo De 16 Anos (1999-2014)

“…A alternativa que tem ganhado proeminência na literatura internacional desde Romer e Romer (2008Romer ( , 2010) é a chamada abordagem narrativa ou bottom-up (de baixo para cima). Ela consiste em mensurar o esforço fiscal pela soma das medidas fiscais discricionárias (ou exógenas) introduzidas pelos governos com base nas estimativas de impactos orçamentários atribuídos pelas autoridades fiscais no momento de sua adoção.…”

Proxy SVARs: Asymptotic Theory, Bootstrap Inference, and the Effects of Income Tax Changes in the United States

“…, p. 3 When applying the proxy SVAR approach, m t can come from a wide variety of sources. For example, MR follow the narrative approach of Romer and Romer (2009) to construct proxy variables for tax shocks, Gertler and Karadi (2015) follow the high frequency approach of Gürkaynak, Sack, and Swanson (2005) to construct proxy variables for monetary policy shocks, and Carriero et al (2015) use Bloom's (2009) measure of uncertainty as a proxy for uncertainty shocks. Thus, the assumptions in Equations (4) and (5) allow for the merging of many different methods of identifying economic shocks with SVARs.…”

“…1 This proxy SVAR approach has proven to be very useful. Mertens and Ravn (2013) use it to merge the SVAR literature on tax shocks (Blanchard and Perotti, 2002;Mountford and Uhlig, 2009) with the narrative approach of Romer and Romer (2010), Gertler and Karadi (2015) and Lunsford (2016) use it to study the effects monetary policy shocks, Carriero et al (2015) use it to study the effects of uncertainty shocks, and Stock and Watson (2012) use it to study the effects of a large number of economic shocks, including oil shocks, productivity shocks, uncertainty shocks, and financial shocks. In addition, Mumtaz, Pinter, and Theodoridis (2015) show that it matches the effects of credit supply shocks from a dynamic stochastic general equilibrium model better than a Cholesky decomposition, and Drautzburg (2015) uses it to estimate a Bayesian VAR and a dynamic stochastic general equilibrium model.…”