Taxes and Growth: New Narrative Evidence from Interwar Britain

54 Pages Posted: 4 Jun 2018

See all articles by James Cloyne

James Cloyne

University of California, Davis; Bank of England - Monetary Analysis

Nicholas Dimsdale

University of Oxford

Natacha Postel-Vinay

London School of Economics & Political Science (LSE) - London School of Economics

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Date Written: May 2018

Abstract

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.

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Suggested Citation

Cloyne, James and Dimsdale, Nicholas and Postel-Vinay, Natacha, Taxes and Growth: New Narrative Evidence from Interwar Britain (May 2018). NBER Working Paper No. w24659. Available at SSRN: https://ssrn.com/abstract=3189954

James Cloyne (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Nicholas Dimsdale

University of Oxford ( email )

Natacha Postel-Vinay

London School of Economics & Political Science (LSE) - London School of Economics

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