Tax Multipliers: Pitfalls in Measurement and Identification

40 Pages Posted: 27 Oct 2012

See all articles by Daniel Riera-Crichton

Daniel Riera-Crichton

Bates College

Carlos A. Vegh

University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER); Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Guillermo Vuletin

Brookings Institution

Date Written: October 2012

Abstract

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.

Suggested Citation

Riera-Crichton, Daniel and Vegh, Carlos A. and Vuletin, Guillermo, Tax Multipliers: Pitfalls in Measurement and Identification (October 2012). NBER Working Paper No. w18497. Available at SSRN: https://ssrn.com/abstract=2167600

Daniel Riera-Crichton (Contact Author)

Bates College ( email )

Lewiston, ME 04240
United States

Carlos A. Vegh

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

University of California at Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-825-7371 (Phone)
310-825-9528 (Fax)

HOME PAGE: http://vegh.sscnet.ucla.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

Guillermo Vuletin

Brookings Institution ( email )

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