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Tax Multipliers: Pitfalls in Measurement and Identification

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  • Daniel Riera-Crichton
  • Carlos A. Vegh
  • Guillermo Vuletin

Abstract

We contribute to the literature on tax multipliers by analyzing the pitfalls in identification and measurement of tax shocks. Our main focus is on disentangling the discussion regarding the identification of exogenous tax policy shocks (i.e., changes in tax policy that are not the result of policymakers responding to output fluctuations) from the discussion related to the measurement of tax policy (i.e., finding a tax policy variable under the direct control of the policymaker). For this purpose, we build a novel value-added tax rate dataset and the corresponding cyclically- adjusted revenue measure at a quarterly frequency for 14 industrial countries for the period 1980-2009. On the identification front, our findings favor the use of narratives à la Romer and Romer (2010) to identify exogenous fiscal shocks as opposed to the identification via SVAR. On the (much less explored) measurement front, our results strongly support the use of tax rates as a true measure of the tax policy instrument as opposed to widely-used, revenue-based measures, such as cyclically-adjusted revenues. While tax multipliers tend to be very small (in absolute value) or even positive when using cyclically-adjusted revenues, they are significantly negative (i.e., tax policy is contractionary) when using tax rates.

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  • Daniel Riera-Crichton & Carlos A. Vegh & Guillermo Vuletin, 2012. "Tax Multipliers: Pitfalls in Measurement and Identification," NBER Working Papers 18497, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18497
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    Cited by:

    1. Giuseppe Bertola & John Driffill & Harold James & Hans-Werner Sinn & Jan-Egbert Sturm & Ákos Valentinyi, 2014. "Chapter 3: Austerity: Hurting but Helping," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 75-90, February.
    2. Andrew Bossie, 2013. "The Effect of Fiscal Policy Shocks on the Flow of Funds," 2013 Papers pbo741, Job Market Papers.
    3. Julia Ruiz Pozuelo & Amy Slipowitz & Guillermo Vuletin, 2016. "Democracy Does Not Cause Growth: The Importance of Endogeneity Arguments," IDB Publications (Working Papers) 95018, Inter-American Development Bank.
    4. Daniel Riera-Crichton & Carlos A. Vegh & Guillermo Vuletin, 2017. "Tax policy and the macroeconomy: Measurement, identification, and non-linearities," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 35(82), pages 10-17, April.
    5. Yang, Weonho & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Macroeconomic effects of fiscal adjustment: A tale of two approaches," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 31-60.
    6. Tito Cordella & Pablo M. Federico & Carlos A. Vegh & Guillermo Vuletin, 2014. "Reserve Requirements in the Brave New Macroprudential World," World Bank Publications, The World Bank, number 17584, November.
    7. Carlos A. Vegh & Guillermo Vuletin, 2014. "Social Implications of Fiscal Policy Responses During Crises," NBER Working Papers 19828, National Bureau of Economic Research, Inc.
    8. Julia Ruiz Pozuelo & Amy Slipowitz & Guillermo Vuletin, 2016. "Democracy Does Not Cause Growth: The Importance of Endogeneity Arguments," IDB Publications (Working Papers) 7758, Inter-American Development Bank.
    9. Anh D.M.Nguyen & Luisanna Onnis & Raffaele Rossi, 2016. "The Macroeconomic Effects of Income and Consumption Tax Changes," Centre for Growth and Business Cycle Research Discussion Paper Series 227, Economics, The Univeristy of Manchester.
    10. Checherita-Westphal, Cristina & Klemm, Alexander & Viefers, Paul, 2016. "Governments’ payment discipline: The macroeconomic impact of public payment delays and arrears," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 147-165.
    11. Felix Reichling & Charles Whalen, 2015. "The Fiscal Multiplier and Economic Policy Analysis in the United States: Working Paper 2015-02," Working Papers 49925, Congressional Budget Office.
    12. Mertens, Karel, 2018. "The Near Term Growth Impact of the Tax Cuts and Jobs Act," Working Papers 1803, Federal Reserve Bank of Dallas.
    13. Daniel Riera-Crichton & Carlos A. Vegh & Guillermo Vuletin, 2017. "Tax policy and the macroeconomy: Measurement, identification, and non-linearities," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 35(82), pages 10-17, April.
    14. Attinasi, Maria Grazia & Klemm, Alexander, 2016. "The growth impact of discretionary fiscal policy measures," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 265-279.
    15. Julio Escolano & Laura Jaramillo & Carlos Mulas-Granados & G. Terrier, 2014. "How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments," IMF Working Papers 14/179, International Monetary Fund.
    16. Jorge Puig, 2014. "Multiplicador del gasto público en Argentina," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 60, pages 188-210, January-D.
    17. Pablo Hernández de Cos & Enrique Moral-Benito, 2016. "Fiscal multipliers in turbulent times: the case of Spain," Empirical Economics, Springer, vol. 50(4), pages 1589-1625, June.
    18. Salvatore Dell'Erba & Todd D. Mattina & Agustin Roitman, 2013. "Pressure or Prudence? Tales of Market Pressure and Fiscal Adjustment," IMF Working Papers 13/170, International Monetary Fund.
    19. Serhan Cevik & Katerina Teksoz, 2014. "Deep Roots of Fiscal Behavior," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 5-33, November.
    20. Carlos A. Vegh & Guillermo Vuletin, 2015. "How Is Tax Policy Conducted over the Business Cycle?," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 327-370, August.
    21. Charles J. Whalen & Felix Reichling, 2015. "The Fiscal Multiplier And Economic Policy Analysis In The United States," Contemporary Economic Policy, Western Economic Association International, vol. 33(4), pages 735-746, October.
    22. François Geerolf & Thomas Grjebine, 2018. "Property Tax Shocks and Macroeconomics," Working Papers 2018-03, CEPII research center.
    23. Kleis, Mischa & Moessinger, Marc-Daniel, 2016. "The long-run effect of fiscal consolidation on economic growth: Evidence from quantitative case studies," ZEW Discussion Papers 16-047, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F3 - International Economics - - International Finance
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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