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The Macroeconomic Effects of Income and Consumption Tax Changes

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  • Anh D.M.Nguyen

    (Applied Macroeconomic Research Division, Economics Department, Bank of Lithuania)

  • Luisanna Onnis

    (Department of Economics, University of Sheffield)

  • Raffaele Rossi

    (Department of Economics, University of Manchester)

Abstract

Do consumption and income tax changes affect the economy differently? We answer this question by estimating structural VARs, where we proxy the latent tax shocks with a newly constructed narrative account of income and consumption tax liability changes in the United Kingdom. We find that income tax shocks have large short run effects on GDP, private consumption and investment. The implied income tax present-value multiplier is around 2.7. The effects of consumption tax cuts are modest and not statistically different from zero on GDP and investment and only marginally expansionary on private consumption. These results indicate that i) it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy, and ii) consistent with conventional public finance theories, consumption taxes are less distortive than income taxes.

Suggested Citation

  • Anh D.M.Nguyen & Luisanna Onnis & Raffaele Rossi, 2017. "The Macroeconomic Effects of Income and Consumption Tax Changes," Working Papers 2017008, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2017008
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    Cited by:

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    2. Occhino, Filippo, 2023. "The macroeconomic effects of business tax cuts with debt financing and accelerated depreciation," Economic Modelling, Elsevier, vol. 125(C).
    3. James Cloyne & Òscar Jordà & Alan M. Taylor, 2020. "Decomposing the Fiscal Multiplier," Working Paper Series 2020-12, Federal Reserve Bank of San Francisco.
    4. Cloyne, James & Jordà , Òscar & Taylor, Alan M., 2023. "State-Dependent Local Projections: Understanding Impulse Response Heterogeneity," CEPR Discussion Papers 17903, C.E.P.R. Discussion Papers.
    5. Karel Mertens, 2018. "The Near Term Growth Impact of the Tax Cuts and Jobs Act," Working Papers 1803, Federal Reserve Bank of Dallas.
    6. Bartal, Mehdi & Becard, Yvan, 2024. "Consumption tax cuts vs stimulus payments," Journal of Public Economics, Elsevier, vol. 239(C).
    7. Hussain Syed M. & Liu Lin, 2018. "Comparing the effects of discretionary tax changes between the US and the UK," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-17, January.
    8. Ziyang Yue & Gangqiang Yang & Haisen Wang, 2023. "How do tax reductions motivate technological innovation?," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-18, December.
    9. 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.
    10. Gkolfinopoulou, Michalitsa & Theophilopoulou, Angeliki, 2025. "Effects of Tax Shocks on Inequality: Empirical Evidence from the United Kingdom," MPRA Paper 123457, University Library of Munich, Germany.
    11. Narciz Balasoiu & Iulian Chifu & Marian Oancea, 2023. "Impact of Direct Taxation on Economic Growth: Empirical Evidence Based on Panel Data Regression Analysis at the Level of Eu Countries," Sustainability, MDPI, vol. 15(9), pages 1-32, April.
    12. Hayo, Bernd & Mierzwa, Sascha, 2023. "The effect of legislated tax changes on the trade balance: Empirical evidence for the United States, Germany, and the United Kingdom," Journal of Macroeconomics, Elsevier, vol. 78(C).
    13. Maier, Sofia & Ricci, Mattia, 2024. "The redistributive impact of consumption taxation in the EU: Lessons from the post-financial crisis decade," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 738-755.
    14. Artem Vdovychenko, 2018. "How Does Fiscal Policy Affect GDP and Inflation in Ukraine?," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 244, pages 25-43.
    15. Joseph Kopecky, 2021. "The Age for Austerity? Population Age Structure and Fiscal Multipliers," Trinity Economics Papers tep1621, Trinity College Dublin, Department of Economics.
    16. Murray, James, 2024. "Fiscal policy reactions and impact over the labor income distribution," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 701-718.
    17. M. Bussi re & L. Ferrara & M. Juillard & D. Siena, 2017. "Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results," Working papers 625, Banque de France.
    18. Kopecky, Joseph, 2022. "The age for austerity? Population age structure and fiscal consolidation multipliers," Journal of Macroeconomics, Elsevier, vol. 73(C).
    19. Anh D.M.Nguyen & Luisanna Onnis & Raffaele Rossi, 2017. "A Narrative Account of Income and Consumption Tax Changes in the United Kingdom 1973-2009," Centre for Growth and Business Cycle Research Discussion Paper Series 234, Economics, The Univeristy of Manchester.
    20. Sascha Mierzwa, 2021. "Technical Appendix: Tax Laws and Revenue Effects," MAGKS Papers on Economics 202139, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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    More about this item

    Keywords

    fiscal policy; narrative account; consumption taxation; income taxation; Proxy-SVAR;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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