Large Changes in Fiscal Policy: Taxes versus Spending
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We examine the evidence on episodes of large stances in fiscal policy, in cases of both fiscal stimuli and fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases. As for fiscal adjustments, those based on spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based on tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.