Working Paper

The Heterogeneous Effects of Government Spending : It’s All About Taxes

Abstract: This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model?s cross-sectional implications.

Keywords: Fiscal stimulus; Government spending; Transfers; Heterogeneous agents;

JEL Classification: D30; E62; H23; H31; N42;

https://doi.org/10.17016/IFDP.2018.1237

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2018-08-22

Number: 1237

Pages: 63 pages