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Essays on state-dependent effects of tax news shocks

Ho Quoc, Tuan
This essay studies the state-dependent effects of the tax news shock on the U.S. output using 1954-2022 quarterly data. To identify the tax news shock, I calculate the five-year average future tax rate from the implied tax information by the yield spread between municipal bonds and treasury bonds. The tax news shock is the news about an increase in the average five-year future tax rate. I employ the method of smooth transition local projection to estimate the effects of the tax news shock on output in various states and joint states of the economy.
In the first chapter, I estimate the effects in the states of business cycles, uncertainty and inflation individually. For business-cycle states, the tax news shock is expansionary in time of recessions and contractionary in time of expansions. The effects are also significantly positive in times of high uncertainty or low inflation, and not significant in times of low uncertainty and high inflation. Furthermore, I find that output responses to the shock in times recessions, high uncertainty and low inflation are significantly higher than in times of expansions, low uncertainty and high inflation.
In the second chapter, I study the tax news shock effects in the joint states. Since the U.S. economic recessions often occur with low inflation or high uncertainty, I perform the joint-state analysis to study the impact of the inflation and uncertainty states on the tax news shock effects in recession time. Using the same empirical method in the first chapter, I estimate output responses to the tax news shock in the intersections between recessions and inflation or uncertainty states. I find that the nature of recessions is important. In demand- driven recessions the tax news shock has significant expansionary effects on output that are, as well, larger than the effects in supply-driven recessions. Likewise, I find significant expansionary effects only in time of high-uncertainty recessions, and the responses are larger in low-uncertainty recessions.