Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks

National Bank of Belgium Working Paper No. 181

60 Pages Posted: 24 Sep 2010 Last revised: 27 Sep 2010

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: November 13, 2009

Abstract

The authors provide empirical evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes using a timing convention. We document that pre-announced but not yet implemented tax cuts give rise to contractions in output, investment and hours worked, while real wages increase. In contrast, there are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary and persistent effects on output, consumption, investment, hours worked and real wages. The findings are shown to be very robust. We argue that tax shocks are empirically important impulses to the US business cycle and that anticipation effects have been significant over several business cycle episodes.

Keywords: policy shocks, tax liabilities, anticipation effects, business cycles

JEL Classification: E20, E32, E62, H30

Suggested Citation

Mertens, Karel and Ravn, Morten O., Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks (November 13, 2009). National Bank of Belgium Working Paper No. 181, Available at SSRN: https://ssrn.com/abstract=1681302

Karel Mertens (Contact Author)

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

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Morten O. Ravn

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