The Aggregate E ff ects of Anticipated and Unanticipated U . S . Tax Policy Shocks : Theory and Empirical Evidence ∗ (original) (raw)
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Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks
American Economic Journal: Economic Policy, 2012
We provide evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes. Preannounced but not yet implemented tax cuts give rise to contractions in output, investment, and hours worked while real wages increase. There are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary effects, on output, consumption, investment, hours worked, and real wages. Results are shown to be robust. Tax shocks are important impulses to the US business cycle and anticipation effects have been important during several business cycle episodes. (JEL E23, E32, E62, H20, H30)
Understanding the aggregate effects of anticipated and unanticipated tax policy shocks
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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.
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