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The Macroeconomic Effects of Income and Consumption Tax Changes

Anh Nguyen, Luisanna Onnis () and Raffaele Rossi ()
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Luisanna Onnis: Department of Economics, University of Sheffield

No 2017008, Working Papers from The University of Sheffield, Department of Economics

Abstract: Do consumption and income tax changes affect the economy differently? We answer this question by estimating structural VARs, where we proxy the latent tax shocks with a newly constructed narrative account of income and consumption tax liability changes in the United Kingdom. We find that income tax shocks have large short run effects on GDP, private consumption and investment. The implied income tax present-value multiplier is around 2.7. The effects of consumption tax cuts are modest and not statistically different from zero on GDP and investment and only marginally expansionary on private consumption. These results indicate that i) it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy, and ii) consistent with conventional public finance theories, consumption taxes are less distortive than income taxes.

Keywords: fiscal policy; narrative account; consumption taxation; income taxation; Proxy-SVAR (search for similar items in EconPapers)
JEL-codes: E62 H24 H25 H31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac, nep-pbe and nep-pub
Date: 2017-02
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http://www.sheffield.ac.uk/economics/research/serps/articles/2017_008 First version, February 2017 (application/pdf)

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Working Paper: The Macroeconomic Effects of Income and Consumption Tax Changes (2016) Downloads
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