Are Tax Cuts Contractionary at the Zero Lower Bound? Evidence from a Century of Data

James Cloyne, Nicholas Dimsdale and Patrick Hürtgen

Journal of Political Economy, 2025, vol. 133, issue 2, 568 - 603

Abstract: Popular New Keynesian macroeconomic models predict that cuts in various types of distortionary taxes are contractionary when monetary policy is constrained at the zero lower bound (ZLB). We turn to a long span of history in the United Kingdom to test this hypothesis. Using a new long-run dataset of narrative-identified tax changes from 1918 to 2020, we show that tax cuts are expansionary in both low-interest-rate environments and more normal times. We do not find evidence of a deflationary spiral at the ZLB. Tax cuts may therefore still be a useful tool to stimulate economic activity when monetary policy is constrained.

Date: 2025
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