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American Economic Review: Vol. 100 No. 3 (June 2010)

AER Volume. 100, Issue 3 | Previous ArticleNext Article

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The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

Article Citation

Romer, Christina D., and David H. Romer. 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks." American Economic Review, 100(3): 763-801.

DOI: 10.1257/aer.100.3.763

Abstract

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. (JEL E32, E62, H20, N12)

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Authors

Romer, Christina D. (U CA, Berkeley)
Romer, David H. (U CA, Berkeley)

JEL Classifications

E32: Business Fluctuations; Cycles
E62: Fiscal Policy
H20: Taxation, Subsidies, and Revenue: General
N12: Economic History: Macroeconomics; Growth and Fluctuations: U.S.; Canada: 1913-