The macroeconomic effects of distortionary taxation

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Abstract

Prescott (1986) estimates that technology shocks account for 75% of the fluctuations in the postwar U.S. economy. This paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances. I find that a significant fraction of the variance of aggregate consumption, investment, output, capital stock, and hours of work can be explained by disturbances in labor and capital tax rates and government consumption. I also use the model to quantify the welfare costs of capital and labor taxation. For both the time series and welfare calculations, maximum likelihood estimates of taste, technology and policy parameters are used.

Original languageEnglish (US)
Pages (from-to)573-601
Number of pages29
JournalJournal of Monetary Economics
Volume33
Issue number3
DOIs
StatePublished - Jun 1994

Keywords

  • Business cycle fluctuations
  • Dynamic general equilibrium
  • Maximum likelihood
  • Taxation

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