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The aggregate effects of anticipated and unanticipated U.S. tax policy shocks: theory and empirical evidence

Mertens, K.; Ravn, M.O.; (2008) The aggregate effects of anticipated and unanticipated U.S. tax policy shocks: theory and empirical evidence. (CEPR Discussion Papers 6673). Centre for Economic Policy and Research (CEPR): London, UK.

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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.

Type: Working / discussion paper
Title: The aggregate effects of anticipated and unanticipated U.S. tax policy shocks: theory and empirical evidence
Publisher version: http://www.cepr.org/pubs/dps/DP6673.asp
Language: English
Keywords: Anticipation effects, fiscal policy, structural estimation, tax liabilities
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/18838
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