NBER Working Paper on Taxes and Growth during Interwar Britain

From the May 2018 NBER series is “Taxes and Growth: New Narrative Evidence from Interwar Britain” by James Cloyne, Nicholas Dimsdale, Natacha Postel-Vinay.

This is part of something of a renaissance of historical research in economics, where careful historical work is used with an eye towards discovering clever identification strategies for causal estimation. It is always impressive when historical events can be used to learn something still relevant for contemporary policy (fiscal multipliers in this case), a task that is not as easy as it sounds. Unlike research on contemporary policy, it also possibly adds the advantage of offering a sense of detachment that can be harder to overcome when dealing with living political actors and stakeholders.  Here is the abstract:

The impact of fiscal policy on economic activity is still a matter of great debate. And, ever since Keynes first commented on it, interwar Britain, 1918- 1939, has remained a particularly contentious case | not least because of its high debt environment and turbulent business cycle. This debate has often focused on the effects of government spending, but little is known about the effects of tax changes. In fact, a number of tax reforms in the period focused on long-term and social objectives, often reflecting the personality of British Chancellors. Based on extensive historiographical research, we apply a narrative approach to the interwar period in Britain and isolate a new series of exogenous tax changes. We find that tax changes have a sizable effect on GDP, with multipliers around 0.5 on impact and exceeding 2 within two years. Our estimates contribute to the historical debate about fiscal policy in the interwar period and are remarkably similar to the sizable tax multipliers found after WWII.


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