Tax multipliers: Pitfalls in measurement and identification |
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| Institution: | 1. School of Accounting, David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112, USA;2. Department of Economics, The University of Warwick and OFCE-SciencesPo, The Social Sciences Building, Coventry, West Midlands CV4 7AL, United Kingdom;1. Giambattista: SGX Analytics, 40 Wall Street, 11th Floor, New York, NY 10005, USA;2. Development Research Group, World Bank, 1818 H St NW, Washington DC 20433, USA |
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| Abstract: | To analyze the pitfalls in measuring and identifying tax shocks, we build a novel value-added tax rate dataset for the period 1980–2009. The problem of identification (i.e., changes in tax policy not triggered by output fluctuations) is clearly disentangled from the problem of measurement (i.e., finding a tax policy variable under the direct control of policymakers). On the identification front, our results favor the use of narratives à la Romer and Romer (2010). On the measurement front, our findings support the use of tax rates as the true measure of tax policy as opposed to revenue-based measures, such as cyclically adjusted revenues. |
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| Keywords: | Tax multiplier Fiscal shocks Identification Narrative Cyclically adjusted revenues |
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