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The effects of tax shocks on output : not so large, but not small either

Author: Roberto Perotti; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2011.
Series: Working paper series (National Bureau of Economic Research), no. 16786.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
In a seminal contribution, Romer and Romer (2010) (RR henceforth) estimate GDP tax multipliers of up to -3 after 3 years. These results have been criticized as implausibly large. For instance, Favero and Giavazzi (2010) (FG henceforth) argue RR's specification cannot be interpreted as a proper (truncated) moving average representation of the output process. They show that when the system is estimated in its VAR  Read more...
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Additional Physical Format: Print version:
Perotti, Roberto, 1961-
Effects of tax shocks on output.
Cambridge, Mass. : National Bureau of Economic Research, ©2011
(DLC) 2011656000
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Roberto Perotti; National Bureau of Economic Research.
OCLC Number: 701724567
Description: 1 online resource (43 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 16786.
Responsibility: Roberto Perotti.

Abstract:

In a seminal contribution, Romer and Romer (2010) (RR henceforth) estimate GDP tax multipliers of up to -3 after 3 years. These results have been criticized as implausibly large. For instance, Favero and Giavazzi (2010) (FG henceforth) argue RR's specification cannot be interpreted as a proper (truncated) moving average representation of the output process. They show that when the system is estimated in its VAR form, or its correct truncated MA representation, a unit realization of the RR shock has much smaller effects on GDP than in RR, typically about - 5 percentage points of GDP. I argue that on theoretical grounds the discretionary component of taxation should be allowed to have different effects than the automatic response of tax revenues to macroeconomic variables; existing approaches, including FG's, that do not allow for this difference, exhibit impulse responses that are biased towards 0. I show that the correct impulse responses to a RR tax shock are about half-way between the large effects estimated by RR and the much smaller effects estimated by FG: typically, a one percentage point of GDP increase in taxes leads to a decline in GDP by about 1.5 percentage points after 3 years. I also create two new datasets of tax shocks, one based on receipts and the other on liabilities; in these datasets, I distinguish between different types of taxes (personal, corporate, indirect, and social security) and their subcomponents.

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