Transcript Romer and Romer (2007): The Macroeconomic Effects of Tax

Romer and Romer (2007):
“The Macroeconomic Effects of Tax Changes:
Estimates Based on a New Measure of Fiscal Shocks”
and
“Do Tax Cuts Starve the Beast? The Effect of Tax
Changes on Government Spending”
Loic Berger
Lena Koerber
UPF, May 4, 2009
Motivation
• Measuring the impact of taxes on output, government
spending and other macroeconomic variables is
difficult:
Tax changes and macroeconomic variables have
often a common cause giving raise to a endogeneity
problem
• Romer and Romer propose new measure of fiscal
shocks based on exogenous variation in taxation
• Their work provides empirical evidence of the effects
of fiscal policy using the dummy variable approach
Data
• Romer and Romer use narrative records
(Economic Report of the President,
Congressional records etc) to identify
significant tax laws between 1947 and 2006
• Classification of tax laws into
– Exogenous tax laws (not motivated by the state of
the economy) intended to either
• Promote long-run growth or
• Reduce an inherited budget deficit
– Endogenous tax laws (motivated by the state of
the economy) related to either
• Countercyclical policy or
• Changes in government spending
Data (cont.)
Methodology
Where Y is either output, its components, or
government spending and T (measured in % of GDP) is
– Any exogenous tax change in the first paper
– An exogenous, long-run growth tax change in the second paper
Findings
(1) The Macroeconomic Effects of Tax Changes:
Estimates Based on a New Measure of Fiscal shocks
• Tax cuts are contractionary
Findings (cont.)
(1) The Macroeconomic Effects of Tax Changes:
Estimates Based on a New Measure of Fiscal shocks
Findings (cont.)
(1) The Macroeconomic Effects of Tax Changes:
Estimates Based on a New Measure of Fiscal shocks
•
•
Persistency
Mechanism: The negative effect of tax increases on output works
primarily through investment
Findings (cont.)
(2) Do Tax Cuts Starve the Beast? The Effect of Tax
Changes on Government Spending
•
The starving the beast hypothesis is rejected
Findings (cont.)
(2) Do Tax Cuts Starve the Beast? The Effect of Tax
Changes on Government Spending
• How does the government balance the budget?
• Exogenous long-run tax cuts are counteracted by future tax
increases