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The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

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  • Christina D. Romer
  • David H. Romer

Abstract

This paper investigates the impact of changes in the level of taxation on economic activity. We use the narrative record -- presidential speeches, executive-branch documents, and Congressional reports -- to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13264.

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Date of creation: Jul 2007
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Handle: RePEc:nbr:nberwo:13264

Note: DAE EFG ME PE
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  16. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  17. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Christina Romer Studies the Impact of Tax Hikes on Growth
    by HistorySquared in HistorySquared on 2012-04-25 13:04:48
  2. Riduzione del debito pubblico: meglio aumentare le tasse o ridurre la spesa?
    by gzanella in Noise from Amerika on 2012-09-04 05:26:17
  3. Given the enormity of the short- and long-run fiscal challenges facing the US, the lack of policy detail from both presidential candidates is disappointing
    by Blog Admin in British Politics and Policy at LSE on 2012-10-25 13:00:36
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