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Should We Care About the Composition of Tax Based Stimulus Packages?

Listed author(s):
  • Kerim Peren ARIN
  • Otto F. REICH
  • Peter H. HELLES

type="main" xml:id="coep12131-abs-0001"> We investigate the effects of tax policy shocks on the U.S. economy over the 1972:3–2008:4 period within a structural vector autoregressive (SVAR) framework. Disaggregating tax shocks suggests that the positive output multipliers documented for total taxes by the previous literature are present only for indirect tax innovations. We also show that both labor and corporate taxes have similar effects on output, with labor tax multipliers being slightly larger in magnitude. The positive and negative responses of inflation following respectively corporate and labor tax shocks imply that former shocks work through aggregate supply, whereas the latter work predominantly through aggregate demand. (JEL C32, E62, H20)

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