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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199621000271
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Non-Linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation (2019)
Working Paper: Non-Linear Effects of Tax Changes on Output: The Role of the Initial Level of Taxation (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:131:y:2021:i:c:s0022199621000271

DOI: 10.1016/j.jinteco.2021.103450

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().