Taxes and Growth: New Narrative Evidence from Interwar Britain
The impact of fiscal policy on economic activity is still a matter of great debate. And, ever since Keynes first commented on it, interwar Britain, 1918- 1939, has remained a particularly contentious case | not least because of its high debt environment and turbulent business cycle. This debate has often focused on the effects of government spending, but little is known about the effects of tax changes. In fact, a number of tax reforms in the period focused on long-term and social objectives, often reflecting the personality of British Chancellors. Based on extensive historiographical research, we apply a narrative approach to the interwar period in Britain and isolate a new series of exogenous tax changes. We find that tax changes have a sizable effect on GDP, with multipliers around 0.5 on impact and exceeding 2 within two years. Our estimates contribute to the historical debate about fiscal policy in the interwar period and are remarkably similar to the sizable tax multipliers found after WWII.
We are grateful for comments and advice from Benjamin Born, Barry Eichengreen, Jason Lennard, Chris Meissner, Eric Monnet, Albrecht Ritschl, Alan Taylor, Ryland Thomas, Jim Tomlinson and seminar participants at Kingston University, Humboldt University, UC Davis, Oxford University, the York Macrohistory Workshop, the Economic History Society Conference 2018, the Monetary History Group at the British Treasury, the Financial and Monetary History Workshop at the Federal Reserve Bank of Cleveland and the London School of Economics. We would also like to thank Jason Lennard for kindly sharing his new fiscal data. All errors remain our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.