Non-Linear Effects of Taxation on Growth

Jaimovich, Nir; Rebelo, Sérgio

doi:10.2139/ssrn.2586497

Cited by 23 publications

(30 citation statements)

References 47 publications

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“…Third, the empirical models in this paper are linear. There may be important nonlinearities in the relationship between marginal tax rates and economic activity, both in the short and long run, see Auerbach and Gorodnichenko (2012) or Jaimovich and Rebelo (2014). Finally, the results in this paper are based on reduced form models and should be combined with realistic structural models to gain greater insight into the tax transmission mechanism.…”

Section: Discussionmentioning

confidence: 99%

Marginal Tax Rates and Income: New Time Series Evidence

Mertens¹

2013

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Using new narrative measures of exogenous variation in marginal tax rates associated with postwar tax reforms in the US, this study estimates short run tax elasticities of reported income of around 1.2 based on time series from 1946 to 2012. Elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups. Previous time series studies of tax returns data have found little evidence for income responses to taxes outside the top of the income distribution. The different results in this study arise because of additional efforts to account for dynamics, expectations and especially the endogeneity of tax policy decisions. Marginal rate cuts lead to increases in real GDP and declines in unemployment. This study also presents evidence that the responses are to marginal tax rates rather than average tax rates. Counterfactual tax cuts targeting the top 1% alone have short-run positive effects on economic activity and incomes outside of the top 1%, but increase inequality in pre-tax incomes. Cuts for taxpayers outside of the top 1% also lead to increases in incomes and economic activity, but with a longer delay.

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Section: Discussionmentioning

confidence: 99%

Marginal Tax Rates and Income: New Time Series Evidence

Mertens¹

2013

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“…In a recent theoretical paper, Jaimovich and Rebelo (2017) show that the long-run output e¤ect of tax changes is small at low initial levels of taxation but exponentially larger when initial tax levels are high. This result is naturally related to a well-established public …nance literature (e.g., Harberger, 1964a and1964b;Browning, 1975;Feldstein, 1995;Hines, 2007) arguing that the excess burden of taxation, or deadweight loss, associated with taxation is modest at low tax taxes, increases with higher tax rates, until, eventually, "a tax [is] imposed at so high rate that it eliminates the tax activity" (Hines, 2007, page 1).…”

Section: The Non-linear E¤ect Of Tax Changes On Outputmentioning

confidence: 99%

“…Rather than focusing on the aforementioned macroeconomic-based non-linear e¤ects, our paper focuses on the non-linear distortion-based e¤ects of tax changes on output. 4 In a recent theoretical paper, Jaimovich and Rebelo (2017) show that the long-run output e¤ect of tax changes is small at low initial levels of taxation but exponentially larger when initial tax levels are high. This result is naturally related to a well-established public …nance literature (e.g., Harberger, 1964a and1964b;Browning, 1975;Feldstein, 1995) arguing that the excess burden of taxation, or deadweight loss, associated with taxation is small at low tax taxes, increases with higher tax rates, until, eventually, "a tax [is] imposed at so high rate that it eliminates the tax activity" (Hines, 2007, page 4 As we will discuss later in Sections 6.3 and 7, macroeconomic-based non-linear e¤ects are not behind the non-linear e¤ects associated with distortion-based arguments.…”

Section: Introductionmentioning

confidence: 99%

Non-Linear Distortion-Based Effects of Tax Changes on Output: A Worldwide Narrative Approach

Gunter¹,

Riera‐Crichton²,

Végh³

et al. 2017

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Inter-American Development Bank. This work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Note that link provided above includes additional terms and conditions of the license.The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent. Guillermo VuletinInter-American Development Bank March 4, 2017 AbstractWe estimate the e¤ect of worldwide tax changes on output following the narrative approach developed for the United States by Romer and Romer (2010). We use a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing) for the period 1970-2014 to identify 96 tax changes. We then use contemporaneous economic records to classify such changes as endogenous or exogenous to current (or prospective) economic conditions. In line with existing theoretical distortion-based arguments -and based on the exogenous tax changes -we …nd that the e¤ect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low/moderate initial tax rate levels and much larger (in absolute terms) as the initial tax rate and the size of the change in the tax rate increases. We also show that the bias introduced by misidenti…cation of tax shocks critically depends on the procyclical or countercyclical nature of endogenous tax changes. We simultaneously evaluate the relevance of our arguments both for our global sample and for Romer and Romer's U.S. dataset.JEL Classi…cation: E32, E62, H20.

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“…Jaimovich and Rebelo () also examine the long‐run impact of income taxation in an endogenous growth model with firm heterogeneity. They use an R&D based growth model in which the efficiency of developing new technology is assumed to be heterogeneous.…”

Section: Related Literaturementioning

confidence: 99%

Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity

Mino

2016

Japanese Economic Review

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This paper constructs a tractable model of endogenous growth with financial frictions and firm heterogeneity. We introduce factor income tax, consumption tax as well as the government consumption into the base model and explore the growth effect of fiscal policy. We show that from the qualitative perspective, the long‐run effects of fiscal actions in our model are similar to those obtained in the representative agent models. However, the quantitative impacts of fiscal policy on long‐run growth in our setting can be substantially different from those established in the model where agents are homogeneous and there is no financial frictions.

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Non-Linear Effects of Taxation on Growth

Cited by 23 publications

References 47 publications

Marginal Tax Rates and Income: New Time Series Evidence

Marginal Tax Rates and Income: New Time Series Evidence

Non-Linear Distortion-Based Effects of Tax Changes on Output: A Worldwide Narrative Approach

Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity

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Non-Linear Effects of Taxation on Growth

Cited by 23 publications

References 47 publications

Marginal Tax Rates and Income: New Time Series Evidence

Marginal Tax Rates and Income: New Time Series Evidence

Non-Linear Distortion-Based Effects of Tax Changes on Output: A Worldwide Narrative Approach ﻿

Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity

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Non-Linear Distortion-Based Effects of Tax Changes on Output: A Worldwide Narrative Approach