Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks

Morten Ravn and Karel Mertens

No 7505, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: E20 E32 E62 H30 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (37)

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Related works:
Journal Article: Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks (2011)
Working Paper: Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy shocks (2009)
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