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A narrative analysis of postwar tax changes

This paper provides a narrative analysis of federal tax legislation in the United States over the period 1945-2007. It uses contemporary primary sources to identify every significant piece of federal tax legislation over this period. It then uses those sources to determine the primary motivation for each action, and the size and timing of its revenue effects. The paper demonstrates that the motivation for almost every significant tax bill falls into one of four categories: responding to a current or planned change in government spending, offsetting other influences on economic activity, reducing an inherited budget deficit, and attempting to increase long-run growth. It also finds that in the small number of cases where more than one motivation is important, it is possible to construct reasonable estimates of the portions of the expected revenue effects due to each motivation. Finally, the paper classifies each tax change on several dimensions, such as whether it was intended to be temporary or permanent, whether it focused on changing marginal tax rates, and whether it significantly changed investment incentives. The results of the analysis can be used as an input into studies of the aggregate effects of changes in taxes. Christina D. Romer David H. Romer Department of Economics Department of Economics University of California, Berkeley University of California, Berkeley Berkeley, CA 94720-3880 Berkeley, CA 94720-3880 cromer@econ.berkeley.edu dromer@econ.berkeley.edu Economists are interested in the effects of changes in the level of taxation on consumption, shortrun fluctuations, long-run growth, government spending, and other aggregate outcomes. Unfortunately, existing measures of changes in taxes are quite crude. The two most common measures are the change in overall revenues and the change in cyclically adjusted revenues. For example, Bohn (1991) uses the change in overall revenues in a study of the budgetary effects of tax changes; Blanchard and Perotti (2002) use the change in overall revenues net of transfers, adjusted for the effects of changes in income, to investigate the short-run macroeconomic effects of changes in taxes; and Kormendi (1983) uses the change in overall revenues to study the impact of tax changes on consumption. These measures are likely to be correlated with other influences on aggregate outcomes. Many changes in revenues are not the result of policy decisions, but are endogenous responses to non-policy developments. Most obviously, because taxes are a function of income, changes in income directly affect revenues. Cyclical adjustment is intended to address this issue. But, as Auerbach (2000) stresses, this is far from enough to eliminate the effects of non-policy factors: changes in stock prices, inflation, the distribution of income, and a host of other forces affect revenues. Since many of these forces are likely to affect aggregate outcomes, or likely to be correlated with other influences on aggregate outcomes, this greatly complicates efforts to determine the effects of changes in taxation. Moreover, legislated tax changes have numerous motivations. Some reflect efforts to stimulate a weak economy or to restrain an overheated one; others result from views about the incentive effects of marginal tax rates; others occur in conjunction with decisions to adopt new spending programs; and so on. As with non-policy changes, changes in taxes resulting from policy actions due to different motivations may be correlated with other determinants of aggregate outcomes. For example, including tax changes taken because the economy is faltering in estimating the effects of tax changes on short-run fluctuations would be likely to yield underestimates of the true effects. Similarly, to test whether tax cuts cause a