The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

Christina Romer and David Romer

No 13264, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates the impact of changes in the level of taxation on economic activity. We use the narrative record -- presidential speeches, executive-branch documents, and Congressional reports -- to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

JEL-codes: E32 E62 H30 N12 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-mac and nep-pbe
Note: DAE EFG ME PE
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Citations: View citations in EconPapers (122)

Published as Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.

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Journal Article: The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks (2010)
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