The Effects of Tax Shocks on Output: Not So Large, But Not Small Either
In a seminal contribution, Romer and Romer (2010) introduce a new dataset of exogenous tax changes and estimate a tax multiplier at 3 years of about -3. These results have been criticized as implausibly large. In this paper, I argue that on theoretical grounds the discretionary component of taxation should be allowed to have different effects on output than the automatic response of tax revenues to macroeconomic variables. Existing approaches, that do not allow for this difference, exhibit impulse responses that are biased towards 0. I then show that allowing for this difference leads to tax multipliers that are about half-way between the large effects estimated by Romer and Romer and the much smaller effects estimated by Favero and Giavazzi (2010): typically, a one percentage point of GDP increase in taxes leads to a decline in GDP by about 1.5 percentage points after 3 years.
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- Karel Mertens & Morten O. Ravn, 2009.
"Empirical evidence on the aggregate effects of anticipated and unanticipated US tax policy shocks,"
Working Paper Research
181, National Bank of Belgium.
- Karel Mertens & Morten O. Ravn, 2012. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 145-81, May.
- Karel Mertens & Morten Ravn, 2010. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," NBER Working Papers 16289, National Bureau of Economic Research, Inc.
- Mertens, Karel & Ravn, Morten O, 2009. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," CEPR Discussion Papers 7370, C.E.P.R. Discussion Papers.
- Ryan Chahrour & Stephanie Schmitt-Groh� & Mart�n Uribe, 2012.
"A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier,"
American Economic Journal: Economic Policy,
American Economic Association, vol. 4(2), pages 28-45, May.
- Chahrour, Ryan & Schmitt-Grohé, Stephanie & Uribe, Martín, 2010. "A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier," CEPR Discussion Papers 7930, C.E.P.R. Discussion Papers.
- Ryan Chahrour & Stephanie Schmitt-Grohé & Martín Uribe, 2010. "A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier," NBER Working Papers 16169, National Bureau of Economic Research, Inc.
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