Asymmetric Effects of Exogenous Tax Changes

Syed M. Hussain and Samreen Malik
Authors registered in the RePEc Author Service: Syed Muhammad Hussain and syed Murtaza hussain, Sr.

Journal of Economic Dynamics and Control, 2016, vol. 69, issue C, 268-300

Abstract: We study whether output responds symmetrically to tax increases and decreases in postwar US data, using the identification strategy in Romer and Romer (2010). We find evidence of important asymmetries: the output response to a tax increase is statistically insignificant, but output shows a significantly positive and permanent increase following a tax decrease. We show that this asymmetry appears to be driven by individual-income tax changes, and is transmitted to the economy through asymmetric response in aggregate consumption to tax increases and tax decreases. We also present a simple model that rationalizes our empirical findings, and illustrates how asymmetric output and consumption responses to sign-based tax changes can be generated by plausible consumption-adjustment costs.

Keywords: Tax Changes; Asymmetric Responses; Non-linear Impulse Responses (search for similar items in EconPapers)
JEL-codes: E62 H20 N12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:69:y:2016:i:c:p:268-300

DOI: 10.1016/j.jedc.2016.05.022

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