Working Paper: CEPR ID: DP6673
Authors: Karel Mertens; Morten O. Ravn
Abstract: We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between "surprise" and "anticipated" tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters using a simulation estimator and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980?s recession.
Keywords: Anticipation Effects; Fiscal Policy; Structural Estimation; Tax Liabilities
JEL Codes: E20; E32; E62; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated tax cuts (H29) | aggregate output (E10) |
| unanticipated tax cuts (H29) | consumption of nondurables and services (E20) |
| unanticipated tax cuts (H29) | purchases of consumer durables (E20) |
| unanticipated tax cuts (H29) | investment (G31) |
| unanticipated tax cuts (H29) | hours worked (J22) |
| anticipated tax cuts (H29) | output (C67) |
| anticipated tax cuts (H29) | hours worked (J22) |
| anticipated tax cuts (H29) | investment (G31) |