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American Economic Review: Vol. 103 No. 4 (June 2013)

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Discretionary Tax Changes and the Macroeconomy: New Narrative Evidence from the United Kingdom

Article Citation

Cloyne, James. 2013. "Discretionary Tax Changes and the Macroeconomy: New Narrative Evidence from the United Kingdom." American Economic Review, 103(4): 1507-28.

DOI: 10.1257/aer.103.4.1507

Abstract

This paper provides new estimates of the macroeconomic effects of tax changes using a new narrative dataset for the United Kingdom. Identification is achieved by isolating “exogenous” tax policy changes using the Romer and Romer narrative strategy. I find that a 1 percent cut in taxes increases GDP by 0.6 percent on impact and 2.5 percent over three years. The findings are remarkably similar to Romer and Romer narrative estimates for the United States, reinforcing the view that tax changes have powerful and persistent effects. “Exogenous” tax changes are also shown to have contributed to important episodes in the UK business cycle.

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Additional Materials

Online Appendix (435.64 KB) | Download Data Set (190.75 KB) | Author Disclosure Statement(s) (187.18 KB)

Authors

Cloyne, James (Bank of England)

JEL Classifications

E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
E62: Fiscal Policy
H20: Taxation, Subsidies, and Revenue: General
H61: National Budget; Budget Systems


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