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The macroeconomic effects of legislated tax changes in Germany

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  • Bernd Hayo
  • Matthias Uhl

Abstract

This paper studies the short-term macroeconomic effects of legislated tax changes in Germany using a five-variable vector autoregression (VAR) framework. Identification of the tax shock follows a recently proposed narrative approach. Based on a historical account of German tax legislation, the timing, size, and motivation of legislated tax changes are assessed and a time series of exogenous tax shocks is constructed. The VAR results indicate a substantial and statistically significant reaction of output following implementation of a tax change. In response to a one percentage point increase in the tax-to-GDP ratio, we observe a maximum output reduction of 2.4%. These results suggest that previous estimates of the effects of tax changes on output in Germany are downward biased.

Suggested Citation

  • Bernd Hayo & Matthias Uhl, 2014. "The macroeconomic effects of legislated tax changes in Germany," Oxford Economic Papers, Oxford University Press, vol. 66(2), pages 397-418.
    • Handle: RePEc:oup:oxecpp:v:66:y:2014:i:2:p:397-418.
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    File URL: http://hdl.handle.net/10.1093/oep/gpt017
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