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State-Dependent Effects of Tax Changes in Germany and the United Kingdom

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  • Bernd Hayo

    (University of Marburg)

  • Sascha Mierzwa

    (University of Marburg)

Abstract

We study state-dependent effects of narratively identified tax shocks in Germany and the UK over the period 1974Q1–2018Q4 using local projections. In addition, we distinguish between aggregated and disaggregated tax types (direct and indirect taxes) as well as look for possible asymmetries between tax hikes and tax cuts. We find a number of differences across the business cycle, and between sample countries, tax types, and direction of tax changes. For instance, aggregated tax cuts initially have a larger effect during times of non-recession in Germany, whereas we find no state-dependent effects for the UK. When disaggregating tax types, German indirect tax cuts only appear expansionary during downturns, whereas the effect is positive throughout the business cycle in the UK. Furthermore, we find different reactions when considering tax cuts and hikes individually: tax hikes can be expansionary in Germany (UK) when implemented during non-recessionary (recessionary) periods whereas they are contractionary during recessions (non-recessions). When considering tax cuts, German GDP rises only when cuts are enacted in times of non-recession, whereas in the UK, the reactions is positive in either case and mostly symmetric. All these findings are robust to various changes in the econometric setup.

Suggested Citation

  • Bernd Hayo & Sascha Mierzwa, 2021. "State-Dependent Effects of Tax Changes in Germany and the United Kingdom," MAGKS Papers on Economics 202125, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:202125
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    Cited by:

    1. Sascha Mierzwa, 2021. "Spillovers from Tax Shocks to the Euro Area," MAGKS Papers on Economics 202133, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. 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).
    3. 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; tax policy; legislated tax changes; state dependence; direct taxes; indirect taxes; asymmetric effects; Germany; United Kingdom; local projections; narrative approach;
    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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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