Working Paper: NBER ID: w24659
Authors: James Cloyne; Nicholas Dimsdale; Natacha Postel-Vinay
Abstract: The impact of fiscal policy on economic activity is still a matter of great debate. And, ever since Keynes first commented on it, interwar Britain, 1918- 1939, has remained a particularly contentious case | not least because of its high debt environment and turbulent business cycle. This debate has often focused on the effects of government spending, but little is known about the effects of tax changes. In fact, a number of tax reforms in the period focused on long-term and social objectives, often reflecting the personality of British Chancellors. Based on extensive historiographical research, we apply a narrative approach to the interwar period in Britain and isolate a new series of exogenous tax changes. We find that tax changes have a sizable effect on GDP, with multipliers around 0.5 on impact and exceeding 2 within two years. Our estimates contribute to the historical debate about fiscal policy in the interwar period and are remarkably similar to the sizable tax multipliers found after WWII.
Keywords: Fiscal Policy; Tax Changes; Economic Activity; Interwar Britain; GDP; Historical Analysis
JEL Codes: E32; E62; H2; N1; N44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax policy (H29) | Economic activity (E29) |
| One percentage point cut in taxes as a percentage of GDP (H69) | Increase in GDP (E20) |
| Tax cuts (H29) | Decrease in unemployment (J68) |
| Tax cuts (H29) | Increase in interest rates (E43) |
| Exogenous tax changes (H29) | Not predicted by past macroeconomic variables (E19) |