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Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom

Author

Listed:
  • Bernd Hayo

    (Philipps University Marburg)

  • Sascha Mierzwa

    (Philipps University Marburg)

Abstract

We study the effect of tax policy on stock market returns in the US, Germany, and the UK using GARCH models and a unique daily dataset of legislative tax changes during the period 1978 to 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, whereas business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legislative stage. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX returns, whereas FT30 returns barely react on days of domestic legislative action.

Suggested Citation

  • Bernd Hayo & Sascha Mierzwa, 2020. "Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom," MAGKS Papers on Economics 202047, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:202047
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    References listed on IDEAS

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    Cited by:

    1. Hayo, Bernd & Mierzwa, Sascha, 2022. "Legislative tax announcements and GDP: Evidence from the United States, Germany, and the United Kingdom," Economics Letters, Elsevier, vol. 216(C).
    2. Sascha Mierzwa, 2021. "Technical Appendix: Tax Laws and Revenue Effects," MAGKS Papers on Economics 202139, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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    More about this item

    Keywords

    Fiscal policy; legislative tax changes; stock markets; income tax; business tax; indirect tax; United States; Germany; United Kingdom;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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