What are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation

This paper estimates the effects of tax changes on the U.K. economy. Identification is achieved by isolating the ‘exogenous’ tax policy shocks in the post-war U.K. economy using a narrative strategy as in Romer and Romer (2010). The resulting tax changes are shown to be unforecastable on the basis of past macroeconomic data. I find that a 1 per cent cut in taxes stimulates GDP by 0.6 per cent on impact and by 2.5 per cent over three years. These findings are remarkably similar to the corresponding estimates for the United States. The results reinforce the view that tax changes do indeed have powerful, persistent and significant effects on the economy. Finally, ‘exogenous’ tax changes are shown to have contributed to major episodes in the U.K. business cycle.fiscal policy, tax shocks, tax multiplier, narrative approach, business cycles

Discretionary tax shocks in the United Kingdom 1945-2009: a narrative account and dataset

This paper constructs a narrative account of all legislated discretionary policy changes in the United Kingdom from 1945 to 2009. Following Romer and Romer (2009, 2010), evidence of the policymakers’ motivation is presented from U.K. official Budget documents together with technical notes, press releases, Acts of Parliament, the Budget speech by the Chancellor of the Exchequer and related entries in the parliamentary record (Hansard). The historical context in which the decision was made is also discussed. Using the given motives I isolate tax policy changes which were not responding to, or influenced by, current or prospective economic shocks. This ‘exogenous’ category is comprised of actions to improve long-run economic performance, those motivated by ideological or political reasons, rulings from external bodies such as courts, and fiscal consolidation measures based on long-run considerations. By contrast, the ‘endogenous’ changes are actions to manage demand, to stimulate production, to offset a debt crisis and those to fund spending decisions. For all the tax changes I collect information on the announcement, implementation and withdrawal dates as well as the type of the tax (such as income tax). The dataset contains nearly 2,500 tax changes and is aggregated into a quarterly series for analysis. In addition to creating a novel dataset this paper also contributes to the post-war history of U.K. taxation

Discretionary tax shocks in the United Kingdom 1945-2009: a narrative account and dataset

This paper constructs a narrative account of all legislated discretionary policy changes in the United Kingdom from 1945 to 2009. Following Romer and Romer (2009, 2010), evidence of the policymakers’ motivation is presented from U.K. official Budget documents together with technical notes, press releases, Acts of Parliament, the Budget speech by the Chancellor of the Exchequer and related entries in the parliamentary record (Hansard). The historical context in which the decision was made is also discussed. Using the given motives I isolate tax policy changes which were not responding to, or influenced by, current or prospective economic shocks. This ‘exogenous’ category is comprised of actions to improve long-run economic performance, those motivated by ideological or political reasons, rulings from external bodies such as courts, and fiscal consolidation measures based on long-run considerations. By contrast, the ‘endogenous’ changes are actions to manage demand, to stimulate production, to offset a debt crisis and those to fund spending decisions. For all the tax changes I collect information on the announcement, implementation and withdrawal dates as well as the type of the tax (such as income tax). The dataset contains nearly 2,500 tax changes and is aggregated into a quarterly series for analysis. In addition to creating a novel dataset this paper also contributes to the post-war history of U.K. taxation

Discretionary tax shocks in the United Kingdom 1945-2009: a narrative account and dataset

This paper constructs a narrative account of all legislated discretionary policy changes in the United Kingdom from 1945 to 2009. Following Romer and Romer (2009, 2010), evidence of the policymakers’ motivation is presented from U.K. official Budget documents together with technical notes, press releases, Acts of Parliament, the Budget speech by the Chancellor of the Exchequer and related entries in the parliamentary record (Hansard). The historical context in which the decision was made is also discussed. Using the given motives I isolate tax policy changes which were not responding to, or influenced by, current or prospective economic shocks. This ‘exogenous’ category is comprised of actions to improve long-run economic performance, those motivated by ideological or political reasons, rulings from external bodies such as courts, and fiscal consolidation measures based on long-run considerations. By contrast, the ‘endogenous’ changes are actions to manage demand, to stimulate production, to offset a debt crisis and those to fund spending decisions. For all the tax changes I collect information on the announcement, implementation and withdrawal dates as well as the type of the tax (such as income tax). The dataset contains nearly 2,500 tax changes and is aggregated into a quarterly series for analysis. In addition to creating a novel dataset this paper also contributes to the post-war history of U.K. taxation

Discretionary tax shocks in the United Kingdom 1945-2009: a narrative account and dataset

This paper constructs a narrative account of all legislated discretionary policy changes in the United Kingdom from 1945 to 2009. Following Romer and Romer (2009, 2010), evidence of the policymakers’ motivation is presented from U.K. official Budget documents together with technical notes, press releases, Acts of Parliament, the Budget speech by the Chancellor of the Exchequer and related entries in the parliamentary record (Hansard). The historical context in which the decision was made is also discussed. Using the given motives I isolate tax policy changes which were not responding to, or influenced by, current or prospective economic shocks. This ‘exogenous’ category is comprised of actions to improve long-run economic performance, those motivated by ideological or political reasons, rulings from external bodies such as courts, and fiscal consolidation measures based on long-run considerations. By contrast, the ‘endogenous’ changes are actions to manage demand, to stimulate production, to offset a debt crisis and those to fund spending decisions. For all the tax changes I collect information on the announcement, implementation and withdrawal dates as well as the type of the tax (such as income tax). The dataset contains nearly 2,500 tax changes and is aggregated into a quarterly series for analysis. In addition to creating a novel dataset this paper also contributes to the post-war history of U.K. taxation

Government spending shocks, wealth effects and distortionary taxes

This paper investigates the transmission mechanism of government spending shocks in an estimated dynamic general equilibrium model. I construct a New Keynesian model with distortionary labour and capital taxes and with references that allow the wealth effect on labour supply to vary in strength. I show that the interaction of these two features crucially affects the response of the economy to a government spending shock. The model's parameters are therefore estimated (including the tax policy rules) for the United States. I show that the estimated model can match the positive empirical response of key variables including output, consumption and the real wage - a challenge for many New Keynesian models. I find that the estimated importance of the wealth effect is small; that sticky prices, variable capital utilisation, investment adjustment costs and habits all play an important role; and that whilst tax rates rise following the shock, their small magnitude crucially reduces the distortions involved

Monetary policy, corporate finance and investment

En este trabajo se presenta nueva evidencia acerca del efecto que la política monetaria tiene sobre la inversión y la financiación de las empresas en Estados Unidos y en el Reino Unido. Las empresas más jóvenes y que no pagan dividendos son las que muestran la mayor, —y estadísticamente significativa—, reacción en términos de inversión en capital fijo, mientras que las empresas relativamente antiguas casi no presentan reacción alguna. Esto es así aun controlando por características tradicionales en esta literatura, como son el tamaño, el crecimiento en activos, la valuación, el apalancamiento y liquidez. La reacción de empresas jóvenes que no pagan dividendos explica el movimiento de la inversión agregada. Después de una contracción en la política monetaria, se observa una reacción de la valuación de todas las empresas, mientras que la deuda responde solo para aquellas empresas jóvenes que no pagan dividendos. Esto se debe a que estas últimas son las más expuestas a cambios en el valor del colateral a la hora de endeudarse. Por otro lado, se observa también una reacción en los flujos de caja, aunque dicha reacción es relativamente pequeña y homogénea entre empresas. Estos resultados resaltan la importancia de la estructura financiera, así como de las fricciones en la financiación externa de las empresas, en la amplificación de los efectos de la política monetaria sobre la inversión empresarialWe provide new evidence on how monetary policy affects investment and firm finance in the United States and the United Kingdom. Younger firms paying no dividends exhibit the largest and most signifcant change in capital expenditure – even after conditioning on size, asset growth, Tobin’s Q, leverage or liquidity – and drive the response of aggregate investment. Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all firms but borrowing declines only for younger non-dividend payers, as their external finance is mostly exposed to asset value fluctuations. Conversely, cash-flows change less markedly and more homogeneously across groups. Our findings highlight the role of firm finance and financial frictions in amplifying the effects of monetary policy on investmen

Estimating the elasticity of intertemporal substitution using mortgage notches

Using a novel source of quasi-experimental variation in interest rates, we develop a new approach to estimating the Elasticity of Intertemporal Substitution (EIS). In the U.K., the mortgage interest rate features discrete jumps - notches - at thresholds for the loan-to-value (LTV) ratio. These notches generate large bunching below the critical LTV thresholds and missing mass above them. We develop a dynamic model that links these empirical moments to the underlying structural EIS. The average EIS is small, around 0.1, and quite homogeneous in the population. This finding is robust to structural assumptions and can allow for uncertainty, a wide range of risk preferences, portfolio reallocation, liquidity constraints, present bias, and optimization frictions. Our findings have implications for the numerous calibration studies that rely on larger values of the EIS

The effect of house prices on household borrowing: a new approach

We investigate the effect of house prices on household borrowing using administrative mortgage data from the United Kingdom and a new empirical approach. The data contain household-level information on house prices and borrowing in a panel of homeowners, who refinance at regular and quasi-exogenous intervals. The data and setting allow us to develop an empirical approach that exploits house price variation coming from the idiosyncratic and exogenous timing of refinance events around the Great Recession. We present two main results. First, there is a clear and robust effect of house prices on borrowing. Second, the effect of house prices on borrowing can be explained largely by collateral effects. We study the collateral channel through a multivariate and nonparametric heterogeneity analysis of proxies for collateral and wealth effects