The dynamic effects of changes in business and income taxes on output : evidence from American fiscal policy

This paper examines the effects of various fiscal shocks on economic activity. Evidence from a structural vector autoregression confirms that government purchases increase GDP and private consumption, while taxes have the opposite effect. Paradoxically, the findings support the (mostly) non-Keynesian view that government spending negatively affects private output. An analysis of specific types of taxes yields an even more nuanced conclusion. In accordance with the new Keynesian and neoclassical schools, social security taxes have a severely negative effect on GDP. On the other hand, personal and corporate income taxes have only weak effects on fluctuations in output. Surprisingly, GDP responds disproportionately to movements in indirect business taxes. Consequently, policymakers should adopt a tax-oriented Keynesian approach to fiscal stimulus, in which the broadest types of taxes are reduced the most