Publication Title

Journal of International Economics

Document Type

Article

Department or Program

Economics

Publication Date

7-1-2021

Keywords

Narrative approach, Non-linear, Tax multiplier, Tax policy, Tax rate, Value-added tax

Abstract

We estimate the effect 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 theoretical distortionary and disincentive-based arguments – and using exogenous tax changes – we find that the effect of tax changes on output is highly non-linear. The tax multiplier is essentially zero under relatively low initial tax rate levels and more negative as the initial tax rate increases. 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 industrial Europe (e.g., Alesina, Favero, and Giavazzi, 2015) may represent a special case driven by high initial tax rates in these countries.

Copyright Note

This is the publisher's version of the work. This publication appears in Bates College's institutional repository by permission of the copyright owner for personal use, not for redistribution.

Required Publisher's Statement

Original version is available from the publisher at: https://doi.org/10.1016/j.jinteco.2021.103450

Download

Share

COinS