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

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  • James Cloyne

Abstract

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.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.103.4.1507
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 4 (June)
Pages: 1507-28

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:4:p:1507-28

Note: DOI: 10.1257/aer.103.4.1507
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  1. Mertens, Karel & Ravn, Morten O., 2009. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," CEPR Discussion Papers 7370, C.E.P.R. Discussion Papers.
  2. Cloyne, James S, 2010. "Discretionary tax shocks in the United Kingdom 1945-2009: a narrative account and dataset," MPRA Paper 34913, University Library of Munich, Germany.
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Cited by:
  1. Cloyne, James & Surico, Paolo, 2014. "Household debt and the dynamic effects of income tax changes," Bank of England working papers 491, Bank of England.
  2. Olivier Cardi & Romain Restout, 2012. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Working Papers of BETA 2012-01, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Manuel Coutinho Pereira & Lara Wemans, 2013. "Output effects of a measure of tax shocks based on changes in legislation for Portugal," Working Papers w201315, Banco de Portugal, Economics and Research Department.
  4. Bernd Hayo & Matthias Uhl, 2014. "Taxation and Consumption: Evidence from a Representative Survey of the German Population," MAGKS Papers on Economics 201420, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  5. Ji, K., 2013. "Essays on tax policy, institutions, and output," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5928131, Tilburg University.
  6. Hashmat Khan & Abeer Reza, 2013. "House Prices, Consumption, and Government Spending Shocks," Carleton Economic Papers 13-10, Carleton University, Department of Economics.
  7. Nicholas Oulton, 2013. "Medium and long run prospects for UK growth in the aftermath of the financial crisis," Discussion Papers 1307, Centre for Macroeconomics (CFM).
  8. Cloyne, James & Hürtgen, Patrick, 2014. "The macroeconomic effects of monetary policy: a new measure for the United Kingdom," Bank of England working papers 493, Bank of England.

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