Working Paper: CEPR ID: DP7505
Authors: Karel Mertens; Morten O. Ravn
Abstract: We evaluate the extent to which a dynamic stochastic general equilibrium model can account for the impact of "surprise" and "anticipated" tax shocks estimated from U.S. time-series data. In U.S. data, surprise tax cuts have expansionary and persistent effects on output, consumption, investment and hours worked. Anticipated tax liability tax cuts give rise to contractions in output, investment and hours worked before their implementation while thereafter giving rise to an economic expansion. A DSGE model with changes in tax rates that may be anticipated or not, is shown to be able to account for the empirically estimated impact of tax shocks. The important features of the model include adjustment costs, variable capacity utilization and consumption habits. We derive Hicksian decompositions of the consumption and labor supply responses and show that substitution effects are key for understanding the impact of tax shocks. When allowing for rule-of-thumb consumers, we find that the estimate of their share of the population is only around 10-11 percent.
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) | output (C67) |
| unanticipated tax cuts (H29) | investment (G31) |
| unanticipated tax cuts (H29) | hours worked (J22) |
| anticipated tax cuts (H29) | output (C67) |
| anticipated tax cuts (H29) | investment (G31) |
| anticipated tax cuts (H29) | hours worked (J22) |
| anticipated tax cuts (H29) | consumption (E21) |