This study evaluates how the state of the economy, as measured by the rate of unemployment, influences the short-term effects of tax changes on output and employment. The effects of narratively identified tax changes are examined by employing two alternative approaches to estimating state-dependent impulse response functions that have been widely used in the recent literature. Both approaches suggest that short-term effects of tax changes on output and employment become smaller during times of higher unemployment. That may be because changes in incentives governing the supply of productive inputs may have a lesser effect on resource utilization when there is slack in the economy.
The information in this paper is preliminary and is being circulated to stimulate discussion and critical comment as developmental work for analysis for the Congress. The views expressed here should not be interpreted as CBO’s.
