Working Paper: CEPR ID: DP7370
Authors: Karel Mertens; Morten O. Ravn
Abstract: We provide empirical evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes using a timing-convention. We document that pre-announced but not yet implemented tax cuts give rise to contractions in output, investment and hours worked while real wages increase. In contrast, there are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary and persistent effects on output, consumption, investment, hours worked and real wages. Results are shown to be very robust. We argue that tax shocks are empirically important impulses to the U.S. business cycle and that anticipation effects have been important during several business cycle episodes.
Keywords: anticipation effects; business cycles; fiscal policy; 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 cut (H29) | output (C67) |
| unanticipated tax cut (H29) | consumption (E21) |
| unanticipated tax cut (H29) | investment (G31) |
| unanticipated tax cut (H29) | hours worked (J22) |
| unanticipated tax cut (H29) | real wages (J31) |
| anticipated tax cut (H29) | output (C67) |
| anticipated tax cut (H29) | investment (G31) |
| anticipated tax cut (H29) | hours worked (J22) |
| anticipated tax cut (H29) | real wages (J31) |
| tax shocks (H26) | variance in output (C29) |