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Taxes and the Labor Market

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  • Tommaso Monacelli
  • Roberto Perotti
  • Antonella Trigari

Abstract

We estimate the effect of exogenous changes in taxes on the US unemployment rate and on several other labor market variables. Our estimates are based on a revised version of the Romer and Romer (2010) narrative record of exogenous tax innovations, with the additional benefit of distinguishing between capital income and labor income taxes. We first show that accounting for the difference between automatic and discretionary tax changes in the revised specification is crucial in order to obtain an unbiased measure of the tax multipliers. We then obtain the following main results. An increase in tax receipts of one percent of GDP has a sizeable positive impact on the unemployment rate, and a negative impact on hours worked, labor market tightness and job finding probability. The effect on GDP is also sizeable, but somewhat in the mid range of other values found in the literature, due to the fact that we account for the difference between discretionary and automatic changes in tax revenues. The effect on the unemployment rate of variations in business taxes is larger than that of personal income taxes. We suggest that the latter result poses interesting challenges for future research.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 623.

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Date of creation: Feb 2011
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Handle: RePEc:chb:bcchwp:623

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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. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
  3. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, 03.
  4. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  5. Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 0168, European Central Bank.
  6. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.
  7. Bilbiie, Florin O. & Meier, André & Müller, Gernot J., 2006. "What accounts for the changes in U.S. fiscal policy transmission?," Working Paper Series 0582, European Central Bank.
  8. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes.
  9. Robert E. Hall, 2009. "By How Much Does GDP Rise if the Government Buys More Output?," NBER Working Papers 15496, National Bureau of Economic Research, Inc.
  10. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
  11. Roberto Perotti, 2011. "The Effects of Tax Shocks on Output: Not So Large, But Not Small Either," NBER Working Papers 16786, National Bureau of Economic Research, Inc.
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Cited by:
  1. Mertens, Karel & Ravn, Morten O, 2011. "The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States," CEPR Discussion Papers 8554, C.E.P.R. Discussion Papers.

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