Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom

We study the effect of tax policy on stock market returns in the US, Germany, and the UK using GARCH models and a unique daily dataset of legislative tax changes during the pe-riod 1978 to 2018. We find that days of discretionary tax legislation during all stages of the process often matter for retu...

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Bibliographic Details
Published in:MAGKS - Joint Discussion Paper Series in Economics (Band 47-2020)
Main Authors: Hayo, Bernd, Mierzwa, Sascha
Format: Article
Language:English
Published: Philipps-Universität Marburg 2020
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Summary:We study the effect of tax policy on stock market returns in the US, Germany, and the UK using GARCH models and a unique daily dataset of legislative tax changes during the pe-riod 1978 to 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, whereas business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legislative stage. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX returns, whereas FT30 returns barely react on days of do-mestic legislative action.
Physical Description:46 Pages
ISSN:1867-3678
DOI:10.17192/es2024.0674