Working Paper: NBER ID: w14630
Authors: Eric M. Leeper; Todd B. Walker; Shuchun Susan Yang
Abstract: Fiscal foresight -- the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future -- is intrinsic to the tax policy process. This paper develops an analytical framework to study the econometric implications of fiscal foresight. Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets. Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways. Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies. The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy. We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes.
Keywords: Fiscal foresight; Information flows; Tax policy; Econometric analysis
JEL Codes: E3; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal foresight (H68) | Misalignment of information sets (D83) |
| Misalignment of information sets (D83) | Structural shocks to tax policy cannot be accurately recovered (H31) |
| Conventional econometric methods (C51) | Label tax shocks as linear combinations of various exogenous disturbances (C51) |
| Details of information flows (D83) | Econometric inferences about tax effects (H31) |
| Alternative assumptions about information flows (D89) | Reconcile diverse empirical findings on anticipated tax changes (H31) |
| Lack of foresight (D84) | Significant errors in estimating tax multipliers (H29) |