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The Heterogeneous Effects of Government Spending : It’s All About Taxes

Author

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  • Axelle Ferrière
  • Gaston Navarro

Abstract

This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model’s cross-sectional implications.

Suggested Citation

  • Axelle Ferrière & Gaston Navarro, 2018. "The Heterogeneous Effects of Government Spending : It’s All About Taxes," International Finance Discussion Papers 1237, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1237
    DOI: 10.17016/IFDP.2018.1237
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    References listed on IDEAS

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    Cited by:

    1. Pedro Brinca & Miguel H. Ferreira & Francesco Franco & Hans A. Holter & Laurence Malafry, 2017. "Fiscal Consolidation Programs and Income Inequality," CeBER Working Papers 2017-11, Centre for Business and Economics Research (CeBER), University of Coimbra.
    2. Brinca, Pedro & Oliveira, João & Duarte, João, 2019. "Investment-Specific Technological Change, Taxation and Inequality in the U.S," MPRA Paper 91463, University Library of Munich, Germany.
    3. Gaston Navarro & Axelle Ferriere & Daniel Feenberg, 2017. "Evolution of Tax Progressivity in the U.S.: New Estimates and Welfare Implications," 2017 Meeting Papers 989, Society for Economic Dynamics.
    4. repec:eee:dyncon:v:90:y:2018:i:c:p:45-75 is not listed on IDEAS
    5. Pfammatter, Andrea Corina, 2015. "Do differences in international labor mobility lead to differences in the fiscal multiplier? A theoretical approach," MPRA Paper 68955, University Library of Munich, Germany.
    6. Brinca, Pedro & Holter, Hans A. & Krusell, Per & Malafry, Laurence, 2016. "Fiscal multipliers in the 21st century," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 53-69.
    7. Minjoon Lee & Jinhui Bai & Fudong Zhang & Ruediger Bachmann, 2014. "The Welfare Costs of Fiscal Uncertainty: a Quantitative Evaluation," 2014 Meeting Papers 744, Society for Economic Dynamics.
    8. repec:pal:imfecr:v:66:y:2018:i:2:d:10.1057_s41308-018-0054-8 is not listed on IDEAS
    9. Yum, Minchul, 2018. "On the distribution of wealth and employment," Working Papers 18-03, University of Mannheim, Department of Economics.
    10. Kopiec, Paweł, 2018. "Employment Prospects and the Propagation of Fiscal Stimulus," MPRA Paper 85029, University Library of Munich, Germany.
    11. repec:red:issued:18-4 is not listed on IDEAS

    More about this item

    Keywords

    Fiscal stimulus ; Government spending ; Transfers ; Heterogeneous agents;

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • N42 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: 1913-

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