Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks (original) (raw)
Related papers
2008
We provide empirical evidence on the effects of tax liability changes in the United States. We distinguish between “surprise” and “anticipated” tax shocks. We find that surprise tax cuts have expansionary and persistent effects on output, consumption, investment and hours worked. Prior to their implementation, anticipated tax liability tax cuts give rise to contractions in output, investment and hours worked. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980’s recession.
Understanding the aggregate effects of anticipated and unanticipated tax policy shocks
Review of Economic Dynamics, 2011
We evaluate the extent to which a dynamic stochastic general equilibrium model can account for the impact of "surprise" and "anticipated" tax shocks estimated from U.S. time-series data. Mertens and Ravn (2009) show that surprise tax cuts have expansionary and persistent effects on output, consumption, investment and hours worked. Prior to their implementation, anticipated tax liability tax cuts give rise to contractions in output, investment and hours worked. After their implementation, anticipated tax liability cuts lead to an economic expansion. A DSGE model with changes in tax rates that may be anticipated or not, is shown to be able to account for the empirically estimated impact of tax shocks. The important features of the model include adjustment costs, variable capacity utilization and consumption habits but we do not rely on preferences with low short run wealth effects on labor supply that have been highlighted in the technology news literature. We also derive Hicksian decompositions of the consumption and labor supply responses and show that substitution effects are key for understanding the impact of tax shocks.
The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States
American Economic Review, 2013
This paper estimates the dynamic effects of changes in taxes in the United States. We distinguish between changes in personal and corporate income taxes and develop a new narrative account of federal tax liability changes in these two tax components. We develop an estimator which uses narratively identified tax changes as proxies for structural tax shocks and apply it to quarterly post-WWII data. We find that short run output effects of tax shocks are large and that it is important to distinguish between different types of taxes when considering their impact on the labor market and on expenditure components. (JEL E23, E62, H24, H25, H31, H32)
The Macroeconomic Effects of the Tax Cuts and Jobs Act
Working paper (Federal Reserve Bank of Cleveland)
This paper studies the macroeconomic effects of seven key TCJA provisions, including the tax cuts for individuals and businesses, the bonus depreciation of equipment, the amortization of R&D expenses, and the limits on interest deductibility. I use a dynamic general equilibrium model with interest deductibility and accelerated depreciation. I find that, initially, the tax reform had a small positive impact on output and investment. In the medium term, however, the effect on output will diminish, and the effect on investment will turn negative. The tax reform will depress investment in R&D. Government debt will surge.
The U.S. Corporate Tax Reform and Its Macroeconomic Outcomes
Research in World Economy, 2013
The corporate tax reform has been among the most controversial issues during the past U.S. presidential debates. Though much has been said about the adverse macroeconomic effects of the corporate tax hike, less attention has been paid to the magnitude of such effects. This study attempts to measure the adverse effects of the corporate tax hike on macroeconomic variables such as investment, real GDP, productivity growth, hourly wages, unemployment rate, natural rate of unemployment, and consumer price index (CPI). The estimated regression results with quarterly data from1960 to 2010suggest that a 10% increase in the effective corporate tax rate reduces private investment by3.1%, real GDP by 1.5%, productivity by 2.6%, and hourly wages by 4%. The results also indicate that this increase in the effective corporate tax rate raises short-term unemployment rate by 0.5%, the natural rate of unemployment by 1%, and the consumer price index (CPI) by 0.9%.
Phased-In Tax Cuts and Economic Activity
2004
This paper uses a dynamic general equilibrium model to analyze and quantify the aggregate effects of the timing of the tax rate changes enacted in 2001 and 2003. The 2001 law called for a sequence of successive rate reductions from 2001 until 2006. The 2003 law made immediate the tax rate cuts scheduled for 2004 and 2006 under the earlier law. The phased-in nature of the tax cuts under the 2001 law contributed to the slow recovery from the 2001 recession, while the elimination of the phase-in in 2003 helps explain the sharp increase in economic activity in the second half of 2003. The simulations suggest that while the tax policy was initially a drag on the economy in 2001 and 2002, it increased economic growth by roughly 0.9 percent in 2003 once the phase-ins were eliminated.
The Near Term Growth Impact of the Tax Cuts and Jobs Act
Federal Reserve Bank of Dallas, Working Papers
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 frontloaded 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 suggest 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.
The Private Income Tax Shock Premium
2019
This paper investigates the asset pricing implications of tax policy changes. News about tax cuts decreases future tax revenues and increases future consumer demand and output. Using cross-sectional variation in industry exposure to structurally identified tax news, I develop a factor mimicking private income tax shocks. I construct an investment strategy, which generates annualized risk-adjusted returns of 5.16 % over the Fama-French 3-factor model. I rationalize the finding by arguing that firms with more elastic demands bear higher consumption risk, which works through a wealth effect.
What are the effects of fiscal policy shocks?
Journal of Applied Econometrics, 2009
We propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions. Unlike most of the previous literature this approach does not require that the contemporaneous reaction of some variables to fiscal policy shocks be set to zero or need additional information, such as the timing of wars, in order to identify fiscal policy shocks. The paper's method is a purely vector autoregressive approach which can be universally applied. The approach also has the advantages that it is able to model the effects of announcements of future changes in fiscal policy and that it is able to distinguish between the changes in fiscal variables caused by fiscal policy shocks and those caused by business cycle and monetary policy shocks. We apply the method to US quarterly data from 1955-2000 and obtain interesting results. Our key finding is that the best fiscal policy to stimulate the economy is a deficit-financed tax cut and that the long term costs of fiscal expansion through government spending are probably greater than the short term gains.