Tax Multipliers: Pitfalls in Measurement and Identification
We contribute to the literature on tax multipliers by analyzing the pitfalls in identification and measurement of tax shocks. Our main focus is on disentangling the discussion regarding the identification of exogenous tax policy shocks (i.e., changes in tax policy that are not the result of policymakers responding to output fluctuations) from the discussion related to the measurement of tax policy (i.e., finding a tax policy variable under the direct control of the policymaker). For this purpose, we build a novel value-added tax rate dataset and the corresponding cyclically- adjusted revenue measure at a quarterly frequency for 14 industrial countries for the period 1980-2009.
On the identification front, our findings favor the use of narratives à la Romer and Romer (2010) to identify exogenous fiscal shocks as opposed to the identification via SVAR. On the (much less explored) measurement front, our results strongly support the use of tax rates as a true measure of the tax policy instrument as opposed to widely-used, revenue-based measures, such as cyclically-adjusted revenues. While tax multipliers tend to be very small (in absolute value) or even positive when using cyclically-adjusted revenues, they are significantly negative (i.e., tax policy is contractionary) when using tax rates.
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. We are thankful to Yuriy Goro dnichenko, Samara Gunter, Aart Kray, Constantino Hevia, Rong Qian, Felix Reichling, Agustín Roitman, David Romer, Belen Sbrancia and seminar participants at the Australian Treasury, Banco de Mexico, Brookings Institution, Congressional Budget Office, European Central Bank, Federal Reserve Board of Governors, IMF, Kennedy School of Government, Latin American and Caribbean Economic Association meetings, National Tax Association Annual Spring Symposium, San Francisco Federal Reserve, and Universidad Nacional de La Plata (Argentina) for helpful comments and suggestions. Riera-Crichton and Vuletin gratefully acknowledge the financial support of the Andrew W. Mellon Foundation. Riera-Crichton also acknowledges the financial support of the Bates Faculty Development Grant. Corresponding author: Guillermo Vuletin.
Daniel Riera-Crichton & Carlos A. Vegh & Guillermo Vuletin, 2016. "Tax multipliers: Pitfalls in measurement and identification," Journal of Monetary Economics, vol 79, pages 30-48. citation courtesy of