Non-Linear Effects of Tax Changes on Output : The Role of the Initial Level of Taxation
This paper estimates the effect of worldwide tax changes on output following the narrative approach developed for the United States by Romer and Romer (2010). The analysis uses a novel dataset on value-added taxes for 51 countries (21 industrial an...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/654331544193195012/Non-Linear-Effects-of-Tax-Changes-on-Output-The-Role-of-the-Initial-Level-of-Taxation http://hdl.handle.net/10986/30990 |
| Summary: | This paper estimates the effect of
worldwide tax changes on output following the narrative
approach developed for the United States by Romer and Romer
(2010). The analysis uses 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. It then
uses contemporaneous economic records to classify such
changes as endogenous or exogenous to current (or
prospective) economic conditions. In line with theoretical
distortionary and disincentive-based arguments, and using
only exogenous tax changes, the main finding is that the
effect of tax changes on output is highly non-linear. The
tax multiplier is essentially zero under relatively
low/moderate initial tax rate levels and more negative as
the initial tax rate and the size of the change in the tax
rate increase. Based on a global sample, these novel
non-linear findings suggest that the recent consensus
pointing to large negative tax multipliers in industrial
countries, particularly in Europe (e.g., Alesina, Favero,
and Giavazzi, 2015), (i) is not a robust empirical
regularity, and (ii) is mainly driven by high initial tax
rates in these countries. The paper also shows that the bias
introduced by misidentification of tax shocks critically
depends on the procyclical or countercyclical nature of
endogenous tax changes. The relevance of the arguments is
evaluated both for the novel global sample and for Romer and
Romer's U.S. dataset. |
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