Discretionary Tax Changes and the Macroeconomic Activity: New Narrative Evidence from Australia

Abstract

This paper examines the impact of discretionary tax changes on economic activity in Australia. I use written records such as the Budget Report and Election Speeches to identify the revenue effect, timing and motivation of all major Commonwealth tax policy actions from 1983Q4 to 2018Q4. This approach allows me to isolate legislated tax changes that are not taken for reasons related to prospective economic conditions. I then examine the effects on output by treating the unanticipated exogenous tax changes as an instrument for tax revenue. The resulting estimates indicate that tax cuts are expansionary but much less persistent. The large effects stems in considerable part from a strong positive effect of tax cuts on consumption.