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Non-linear effects of tax changes on output: The role of the initial level of taxation

Samara Gunter, Daniel Riera-Crichton (), Carlos A. Vegh and Guillermo Vuletin ()

Journal of International Economics, 2021, vol. 131, issue C

Abstract: We estimate the effect of worldwide tax changes on output following the narrative approach developed for the United States by Romer and Romer (2010). We use a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970–2014 to identify 96 tax changes. We then use contemporaneous economic records to classify such changes as endogenous or exogenous to current (or prospective) economic conditions. In line with theoretical distortionary and disincentive-based arguments – and using exogenous tax changes – we find that the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low initial tax rate levels and more negative as the initial tax rate increases. Based on a global sample, these novel non-linear findings suggest that the recent consensus pointing to large negative tax multipliers in industrial countries, particularly in industrial Europe (e.g., Alesina, Favero, and Giavazzi, 2015) may represent a special case driven by high initial tax rates in these countries.

Keywords: Tax multiplier; Tax policy; Tax rate; Value-added tax; Non-linear; Narrative approach (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Non-Linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation (2019) Downloads
Working Paper: Non-Linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:131:y:2021:i:c:s0022199621000271

DOI: 10.1016/j.jinteco.2021.103450

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