Essays on Tax Policy and Economic Activity
The Great Recession was the impetus for a great deal of research on domestic fiscal multipliers. However, this work mainly focuses on aggregated tax shocks and neglects the effects of different types of taxes, legislative processes, and spillover effects. These are the gaps I fill with my doctoral t...
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|Summary:||The Great Recession was the impetus for a great deal of research on domestic fiscal multipliers. However, this work mainly focuses on aggregated tax shocks and neglects the effects of different types of taxes, legislative processes, and spillover effects. These are the gaps I fill with my doctoral thesis. I raise a number of policy concerns from a macroeconomic point of view and provide insights into and implications of fiscal policy. To this end, I collected data on discretionary legislated tax changes in the United States, Germany, and the United Kingdom, employing Romer and Romer’s (2009) narrative approach. More specifically, I extended and augmented the Romer and Romer (2009) data for the United States, Cloyne’s (2012) for the United Kingdom, Uhl’s (2013) for Germany, and that of Gechert et al. (2016) for changes in German social security contributions, following the Romer and Romer method and classification, up to the end of 2017. This dataset allows me to quantify and date relevant legislative steps for all significant recorded legislated changes of any tax type at a daily frequency. The Technical Appendix to this thesis (Mierzwa, 2021b) contains a description of the data and the collection process.
The first chapter (Hayo & Mierzwa, 2020) contains an analysis of the response of leading stock indices in the United States, Germany, and United Kingdom—S&P 500, DAX, and FT30—when information about future tax changes is revealed at several important legislative steps. The paper concludes that stock indices react not only to domestic news, but also to announcements in the other two economies. The US Committee on Ways and Mains has an influence on stock returns in all three countries when personal income tax cuts are announced at this stage of the legislative process. In contrast, corporate income tax changes—domestic or foreign—rarely affect markets. During the financial crisis, however, financial markets reacted positively to cuts in corporate income taxes and negatively to cuts in personal income taxes, regardless of the country of origin. This chapter of the thesis contributes to the literature by focusing on the detailed legislative process for, and changes in, tax bills rather than on the implementation date of tax reforms.
The second chapter of my dissertation (Hayo & Mierzwa, 2021a) was motivated by the trade imbalances between the United States and European countries. In this chapter, the effect of aggregated and disaggregated tax shocks on trade variables is analysed and the evidence suggests that cuts to personal income taxes increase the U.S. trade deficit, whereas cuts to indirect taxes can lower the trade balances in Germany and the United Kingdom. Moreover, there are significant spillover effects from the U.S. tax changes to the German and U.K. trade balances. In general, however, the average effects are small, casting doubt on the effectiveness of tax policy to address trade imbalances.
In the third chapter, a joint work with Umut Ünal (Hayo et al., 2021), the short- and long-run elasticities of tax revenues are estimated. Taking into account quantitative information about discretionary tax changes, we adjust revenues and employ a two-step co-integration strategy, thus estimating short-term and long-term tax-to-base, base-to-output, and tax-to-output elasticities. We propose a new measure for asymmetric elasticities in the short run based on the output gap by introducing a neutral state, which can be interpreted more intuitively than the measure used to date in the literature that is solely based on deviations from the long-run equilibrium of tax revenues. We generally find that in Germany and the UK, long-term tax-to-base elasticities are generally higher than short-term elasticities, whereas results for the US are mixed. For tax-to-base elasticities, we find business cycle asymmetries across countries but not within countries and for base-to-output elasticities, our results suggest few asymmetries across countries and more asymmetries across tax types. The findings are relevant for evaluating tax policy from a public revenue viewpoint.
In the fourth chapter (Hayo & Mierzwa, 2021b), Local Projections (Jordà, 2005) are used to estimate tax multipliers for Germany and the United Kingdom conditional on the state of the business cycle. In contrast to findings for the United States (Demirel, 2021) and the United Kingdom (Colombo, 2020), we find no economically significant differences in aggregated tax changes for either Germany or the United Kingdom across phases of recession or non-recession. When disaggregating tax types, German indirect tax cuts appear expansionary only during downturns, whereas the effect is positive throughout the business cycle in the United Kingdom. Furthermore, we discover different reactions when considering tax cuts and hikes individually: tax hikes can be expansionary in Germany (the United Kingdom) when implemented during non-recessionary (recessionary) periods, whereas they are contractionary during recessions (non-recessions). Tax cuts, on the other hand, positively affect German GDP when implemented in periods of non-recession, whereas in the United Kingdom, the reaction is positive in either case and mostly symmetric.
In the fifth chapter (Mierzwa, 2021a), I estimate the spillover effects of tax shocks in the European Monetary Union (EMU), using Local Projections. Results suggest that tax changes in all three countries—the USA, Germany, and the United Kingdom—have statistically and economically significant spillover effects on the GDP of Eurozone countries. Where the shock originated seems to matter more than the state of the business cycle in the recipient country: U.S. (German) tax cuts tend to be expansionary in more cases during recessions (non-recessions), whereas U.K. tax cuts tend to be beneficial regardless of the business cycle phase. German tax cuts can be contractionary when periphery countries are in a recession, as the short-term interest rate rises and, often, the real exchange rate appreciates. U.S. tax cuts, on the other hand, stimulate exports in most countries regardless of the state of the business cycle. Overall, U.K. tax cuts have the largest spillover effects on the GDP of the 11 EMU countries in the sample.
The sixth chapter investigates early reactions to legislated tax changes by looking at the time of introduction to the legislative body rather than at the time of implementation (Hayo & Mierzwa, 2021c). Employing narratively identified tax changes and Local Projections, we find considerable heterogeneity across the three economies: economic activity declines (increases) in the US (the UK) but remains unaffected in Germany. When allowing for different effects across the business cycle, we find evidence that US GDP drops regardless of the business cycle, whereas UK GDP rises only during non-recessionary times. German GDP also reacts in this setup by rising (dropping) during recessionary (non-recessionary) times. Looking at the transmission mechanism for this reaction, we find that consumption, investment, and employment generally follow the dynamics of GDP. Hence, early announcements of planned tax cuts reduce economic activity in the United States regardless of the business cycle, whereas they can be expansionary in Germany (the United Kingdom) during recessions (non-recessions).
The seventh chapter (Mierzwa, 2021b) is a companion paper which summarises the data used throughout this PhD dissertation. It complements and extends the single country datasets published by Romer and Romer (2009), Cloyne (2012), Uhl (2013), Mertens and Ravn (2013), Gechert et al. (2016), and Nguyen et al. (2021). In summary, I shed light on legislated tax shocks by disaggregating them into the most important categories and by timing them more precisely. I find heterogeneous effects and, hence, an analysis based on aggregated tax shocks would appear to be inappropriate. Moreover, effects vary across the three countries in my sample, implying that the usual focus on the United States may be less than appropriate as well.|
|Physical Description:||371 Pages|