The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence

55 Pages Posted: 9 Jun 2008

See all articles by Karel Mertens

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas

Morten O. Ravn

European University Institute - Economics Department (ECO); London Business School - Department of Economics; University of Southampton; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: February 2008

Abstract

We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between surprise and anticipated tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters using a simulation estimator and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980's recession.

Keywords: anticipation effects, fiscal policy, structural estimation, tax liabilities

JEL Classification: E20, E32, E62, H30

Suggested Citation

Mertens, Karel and Ravn, Morten O., The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence (February 2008). CEPR Discussion Paper No. DP6673, Available at SSRN: https://ssrn.com/abstract=1140955

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

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Morten O. Ravn (Contact Author)

European University Institute - Economics Department (ECO) ( email )

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London Business School - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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