DP8554 The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States

Author(s): Karel Mertens, Morten O Ravn
Publication Date: September 2011
Keyword(s): fiscal policy, measurement error, narrative identification, tax changes
JEL(s): E20, E32, E62, H30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8554

This paper estimates the dynamic effects of changes in taxes in the United States. We distinguish between the effects of changes in personal and corporate income taxes using a new narrative account of federal tax liability changes in these two tax components. We develop an estimator in which narratively identified tax changes are used as proxies for structural tax shocks and apply it to quarterly post WWII US data. We find that short run output effects of tax shocks are large and that it is important to distinguish between different types of taxes when considering their impact on the labor market and the major expenditure components.