Tax multipliers: Pitfalls in measurement and identification
Journal of Monetary Economics
Department or Program
Cyclically adjusted revenues, Fiscal shocks, Identification, Narrative, Tax multiplier
To analyze the pitfalls in measuring and identifying tax shocks, we build a novel value-added tax rate dataset for the period 1980-2009. The problem of identification (i.e., changes in tax policy not triggered by output fluctuations) is clearly disentangled from the problem of measurement (i.e., finding a tax policy variable under the direct control of policymakers). On the identification front, our results favor the use of narratives à la Romer and Romer (2010). On the measurement front, our findings support the use of tax rates as the true measure of tax policy as opposed to revenue-based measures, such as cyclically adjusted revenues.
Riera-Crichton, D., Vegh, C.A. and Vuletin, G. 2016. "Tax multipliers: Pitfalls in measurement and identification." Journal of Monetary Econoimcs. 79: 30-48. https://doi.org/10.1016/j.jmoneco.2016.03.003