The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

TLDR

The study examines how tax changes affect economic activity. The authors use narrative records from presidential speeches and Congressional reports to identify the size, timing, and motivation of major postwar tax policy actions, distinguishing those driven by anticipated economic conditions from more exogenous changes. Exogenous tax increases are found to be highly contractionary, with effects that are statistically significant, robust, and substantially larger than those estimated using broader tax change measures. JEL codes: E32, E62, H20, N12.

Abstract

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. (JEL E32, E62, H20, N12)