NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effects of Tax Shocks on Output: Not So Large, But Not Small Either

Roberto Perotti

NBER Working Paper No. 16786
Issued in February 2011
NBER Program(s):   EFG   PE

In a seminal contribution, Romer and Romer (2010) (RR henceforth) estimate GDP tax multipliers of up to -3 after 3 years. These results have been criticized as implausibly large. For instance, Favero and Giavazzi (2010) (FG henceforth) argue RR's specification cannot be interpreted as a proper (truncated) moving average representation of the output process. They show that when the system is estimated in its VAR form, or its correct truncated MA representation, a unit realization of the RR shock has much smaller effects on GDP than in RR, typically about - .5 percentage points of GDP. I argue that on theoretical grounds the discretionary component of taxation should be allowed to have different effects than the automatic response of tax revenues to macroeconomic variables; existing approaches, including FG's, that do not allow for this difference, exhibit impulse responses that are biased towards 0. I show that the correct impulse responses to a RR tax shock are about half-way between the large effects estimated by RR and the much smaller effects estimated by FG: typically, a one percentage point of GDP increase in taxes leads to a decline in GDP by about 1.5 percentage points after 3 years. I also create two new datasets of tax shocks, one based on receipts and the other on liabilities; in these datasets, I distinguish between different types of taxes (personal, corporate, indirect, and social security) and their subcomponents.

download in pdf format
   (288 K)

email paper

This paper is available as PDF (288 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16786

Published: The Effects of Tax Shocks on Output: Not So Large, But Not Small Either, Roberto Perotti. in Trans-Atlantic Public Economics Seminar (TAPES), Fiscal Policy, Gordon and Perotti. 2012

Users who downloaded this paper also downloaded these:
Perotti w17571 The "Austerity Myth": Gain Without Pain?
Blanchard and Perotti w7269 An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output
Perotti w13143 In Search of the Transmission Mechanism of Fiscal Policy
Monacelli, Perotti, and Trigari w15931 Unemployment Fiscal Multipliers
Monacelli and Perotti w14584 Fiscal Policy, Wealth Effects, and Markups
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us