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Macroeconomic effects of discretionary tax changes in Canada: Evidence from a new narrative measure of tax shocks

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  • Syed M. Hussain
  • Lin Liu

Abstract

In this paper we study the macroeconomic effects of changes in federal taxes for the Canadian economy for the time period 1961–2014. We document all legislated tax changes and the motivations behind them. We then employ the narrative methodology of Romer and Romer (2010) and Cloyne (2013) to identify exogenous changes in federal taxes. Our main empirical result shows that a tax cut of 1% of GDP leads to an increase in GDP of 2.1% on impact and a peak increase of 2.68% after three quarters of the initial shock. Disaggregated analysis shows that the response of output is driven by consumption and investment. We also find changes in personal income and other (sales and production) taxes to have strong effects on output. Les effets macroéconomiques des modifications fiscales discrétionnaires au Canada : résultats d'une nouvelle mesure narrative des chocs fiscaux. Dans cet article, nous étudions les effets macroéconomiques des changements dans les impôts fédéraux sur l'économie canadienne pour la période allant 1961 à 2014. Nous faisons état de toutes les modifications fiscales prévues par la loi et des motivations qui les sous‐tendent. Nous utilisons ensuite la méthodologie narrative de Romer et Romer (2010) et de Cloyne (2013) pour recenser les changements exogènes dans les impôts fédéraux. Notre principal résultat empirique montre qu'une réduction d'impôt équivalant à 1% du produit intérieur brut (PIB) entraîne une augmentation de 2,1% du PIB au moment du choc et une augmentation maximale de 2,68% trois trimestres après le choc initial. L'analyse désagrégée montre que la réaction de l'activité économique est attribuable à la consommation et à l'investissement. Nous constatons également que les changements dans l'impôt sur le revenu des particuliers et les autres impôts (sur les ventes et la production) ont des effets importants sur l'activité économique.

Suggested Citation

  • Syed M. Hussain & Lin Liu, 2024. "Macroeconomic effects of discretionary tax changes in Canada: Evidence from a new narrative measure of tax shocks," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(1), pages 78-107, February.
    • Handle: RePEc:wly:canjec:v:57:y:2024:i:1:p:78-107
    DOI: 10.1111/caje.12689
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    References listed on IDEAS

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