Fiscal foresight -- the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future -- is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets. Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy. We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14630.
Length: Date of creation: Jan 2009 Date of revision: Handle: RePEc:nbr:nberwo:14630
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Find related papers by JEL classification: E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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