Estimating the Effects of Tax changes Two Leading Methods for - - PowerPoint PPT Presentation

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Estimating the Effects of Tax changes Two Leading Methods for - - PowerPoint PPT Presentation

Apr 12, 2023 104 likes •307 views

Estimating the Effects of Tax changes Two Leading Methods for Identifying Tax Shocks Two Leading Methods for Identifying Tax Shocks Blanchard and Perotti (2002):

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Estimating the Effects of Tax changes

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Two Leading Methods for Identifying Tax Shocks Two Leading Methods for Identifying Tax Shocks

  • Blanchard and Perotti (2002):

η 𝑐η 𝑐η 𝜁 η 𝑐η 𝑐η 𝜁 η 𝑐η 𝑐η 𝜁

Recall that they also set 𝑐= 𝑐 = 0

They set (1) 𝑐= 𝑐 = 0 to identify the government spending shock; and (2) they use outside information to set 𝑐=2.08.to identify the tax shock.

  • Romer‐Romer (2010) narrative method:

Identify legislated tax changes motivated by reducing inherited deficits or by promoting long‐run growth as exogenous to current state of the economy.

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Mertens‐Ravn’s Contributions Mertens‐Ravn’s Contributions

  • Split the Romer shocks into anticipated vs. unanticipated

Deals directly with issue of fiscal foresight.

  • Reconciles Blanchard‐Perotti and Romer Methods

Develop proxy SVARs to do so.

  • Distinguish between changes in personal income taxes

and corporate income taxes

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5 10 5 10 15 20 Tax Revenue

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Effect of Unanticipated Romer Tax Shock, Trivariate VAR, 1950q1 – 2006q4 Mertens‐Ravn Proxy SVAR (90% confidence intervals) They confirm Romer‐Romer’s large negative multipliers: around ‐2.5 to ‐3.0. BP had preset the elasticity of tax to GDP at 2.08. MR estimate it to 3.13. This makes a big difference for the estimation multiplier.

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Econometric problems caused by fiscal foresight.

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Tax news Tax news

  • Do agents really have foresight?

http://lorenzkueng.droppages.com/

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Tax news Tax news

  • One of the best ways to deal with foresight is to try to

measure the news and incorporate it.

  • Three main methods:
  • Romer‐Romer tax shocks with more than 90 days

between legislation and implementation (Mertens‐ Ravn)

  • Spreads between federal and municipal bonds

Leeper, Richter, Walker (2011), Kueng (2016)

  • DSGE models (Schmidt‐Grohe and Uribe (2012),

Miyamoto‐Nguyen (2015) do this for other types of news)

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Mertens‐Ravn AEJ: Econ Policy. (Left is unanticipated tax decrease, right is anticipated tax decrease implemented at quarter 0.)

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Effect of Anticipated Romer Tax Increase, Mertens‐Ravn (2011) Estimates 1950q1 – 2006q4 (90% confidence intervals)

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Effect of News of Future Tax Increase, Leeper, Richter, Walker (2011) Measure Jorda local projection

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10 5 10 15 20 Output

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10 20 5 10 15 20 Hours

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  • Nondur. + Services Consumption
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Summary of Tax Results Summary of Tax Results

  • Results using Romer‐Romer tax shocks are fairly robust.

There are potential issues with instrument relevance, though.

  • Fiscal foresight for taxes is theoretically and empirically

important.

  • Strong, robust effects of anticipated tax changes.