What Does Ex-Post Evidence Tell Us About the Output Effects of Future Tax Reforms?

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp11029.pdf Non-Technical SummaryAs a result of the global economic recession there is renewed interest in the effects of taxation on economic performance: many countries attempted to use tax cuts as a means to stimulate aggregate demand and now require future tax increases to reduce large public sector deficits partly in response to the crisis. Correctly forecasting the short-run output effects and the long-run growth impact of such tax changes is central from a policy perspective. In practice however, this task is complex: tax changes affect output through a number of transmission channels, and they impact both on demand and supply conditions.There is a large empirical literature estimating the effects of tax changes ex-post that is a potentially useful source of information for policy makers. These studies can be broadly grouped according to whether they present structural estimates, which mostly refer to the medium-and long-run relationships and employ panel methods, or whether they are based on time series for particular countries, generally refer to shorter run effects, make few structural assumptions and are primarily based on vector auto regressions. Both strands of the literature and the short-and long-run effects of tax changes are usually considered separately, even though from a policy perspective and to understand potential trade-offs, this division is not justified. However, irrespective of this distinction a general conclusion would be that, while most studies agree that changes in at least some types of taxation are associated with changes in growth rates or output levels in the short and long run, studies neither agree on the magnitude nor on the direction of the effects.The objective of this paper is to summarize and to evaluate existing ex-post evidence on the shortand long-run output effects (i.e. short-run tax multipliers and long-run growth effects) effects of changes in taxation from the point of view of a policy maker in an OECD country who wishes to predict the output effects of a tax reform ex-ante. For this reason we propose a set of criteria against which we evaluate existing evidence that will ensure distinctness from a more traditional literature review. In particular, a given parameter estimate is useful for predicting the effects of tax reforms according to whether 1) it is relevant, 2) it can be replicated and 3) it is robust and reliable. Whil...

Fiscal Policy and Forecasting Real GDP

“…In the long run, fiscal policy affects the economic growth by affecting the quantity and quality of labor force (Barro 1991). Recently, there are two types of literatures that focus on time series data in the short run and cross section data in the long run relationship (Kneller and Misch, 2011). This chapter focuses the previous studies related to fiscal policy and tries to summarize the results and findings.…”