To Tax or To Ax? Marginal Tax and Spending Multipliers in Consolidations

We introduce the notion of marginal cumulative multiplier — the effect of either government spending or taxation on output holding the other fiscal instrument constant — and apply it to a well known panel of consolidation episodes in 16 countries in the period 1978-2020. In our benchmark specification we estimate a marginal spending multiplier at two years of 1.5 and a marginal tax multiplier close to 0. We also estimate similar multipliers by applying the policy counterfactual method of McKay and Wolf (2023). In an extensive robustness analysis we never find spending multipliers below 1.3 or tax multipliers higher than -1. These findings are seemingly in contrast to those of much of the existing literature on fiscal multipliers, which typically finds higher tax than spending multipliers. We show that this contradiction disappears once the fiscal variables used in the literature are scaled by the proper factor.