Working Paper: NBER ID: w1627
Authors: James M. Poterba; Julio J. Rotemberg; Lawrence H. Summers
Abstract: In classical macroeconomic models with flexible wages and prices,whether a tax is levied on producers or consumers does not affect its incidence. However, if wages or prices are rigid in the short run, as they are in Keynesian macroeconomic models, then shifting a tax from one side ofthe market to the other may have real effects. Tax changes therefore provide potential tests for the presence of nominal rigidities. This paper examines the price and output effects of revenue-neutral shifts between direct and indirect taxation. The results, based on post-war data from both Great Britain and the United States, reject the view that wages and prices are completely flexible in the short run.
Keywords: Nominal Rigidities; Taxation; Macroeconomic Policy
JEL Codes: E62; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shifts in the tax structure from direct to indirect taxation (H20) | significant changes in wages, prices, and output (E39) |
| 1979 tax reform in Great Britain (E65) | increase in the price level by approximately four percent (E31) |
| 1979 tax reform in Great Britain (E65) | continued rise in the price level for eight additional quarters (E31) |
| tax changes (H26) | nominal wages and prices do not adjust immediately (J39) |
| tax structure changes (H20) | real effects (E65) |
| nominal rigidities (D50) | prices rise and output falls following a tax switch (H29) |
| tax changes (H26) | rejection of the null hypothesis of tax neutrality (H29) |