DP7370 Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks

Author(s): Karel Mertens , Morten O. Ravn

Publication Date: July 2009

Keyword(s): anticipation effects , business cycles , fiscal policy , tax liabilities

JEL(s): E20 , E32 , E62 , H30

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7370.asp

We provide empirical evidence on the dynamic effects of tax liability changes in the United States. We distinguish between surprise and anticipated tax changes using a timing-convention. We document that pre-announced but not yet implemented tax cuts give rise to contractions in output, investment and hours worked while real wages increase. In contrast, there are no significant anticipation effects on aggregate consumption. Implemented tax cuts, regardless of their timing, have expansionary and persistent effects on output, consumption, investment, hours worked and real wages. Results are shown to be very robust. We argue that tax shocks are empirically important impulses to the U.S. business cycle and that anticipation effects have been important during several business cycle episodes.