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The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence

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  • Karel Mertens
  • Morten O. Ravn

Abstract

We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between “surprise” and “anticipated” tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. 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 using a simulation estimator 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.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/05.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/05

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Keywords: Fiscal policy; tax liabilities; anticipation effects; structural estimation;

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Cited by:
  1. Karel Mertens & Morten Ravn, 2010. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," NBER Working Papers 16289, National Bureau of Economic Research, Inc.
  2. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  3. Jose Lopez, 2012. "Labor Supply, Aggregation and the Labor Wedge," 2012 Meeting Papers 737, Society for Economic Dynamics.
  4. Carlo Favero & Francesco Giavazzi, 2009. "How large are the effects of tax changes?," NBER Working Papers 15303, National Bureau of Economic Research, Inc.
  5. Brinca, Pedro, 2013. "Distortions in the Neoclassical Growth Model: A Cross-Country Analysis," Research Papers in Economics 2013:13, Stockholm University, Department of Economics.
  6. Eric M. Leeper, 2009. "Anchoring Fiscal Expectations," NBER Working Papers 15269, National Bureau of Economic Research, Inc.
  7. Carlo A. Favero & Francesco Giavazzi, 2010. "Reconciling VAR-based and Narrative Measures of the Tax-Multiplier," Working Papers 361, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  8. Todd B. Walker & Shu-Chun Susan Yang & Eric M. Leeper, 2008. "Fiscal Foresight: Analytical Issues," 2008 Meeting Papers 786, Society for Economic Dynamics.
  9. Alexander Kriwoluzky, 2008. "Matching Theory and Data: Bayesian Vector Autoregression and Dynamic Stochastic General Equilibrium Models," SFB 649 Discussion Papers SFB649DP2008-060, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  10. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
  11. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.

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