The Macroeconomic Effects of Tax Shocks: Narrative Evidence from Japan

This paper constructs a comprehensive narrative dataset of exogenous tax changes in Japan (1955-2023) and estimates their dynamic macroeconomic effects using distributed-lag and VAR models. Exogeneity is identified via a Romer and Romer-style narrative approach. In the full sample, a 1% of GDP exogenous tax increase reduces out-put by about 5% at its peak. The aggregate tax multiplier has declined and become more front-loaded over time, reflecting a compositional shift from long-run income tax cuts to deficit-driven consumption tax increases around 1989Q3. These results suggest that changes in tax composition, rather than monetary conditions alone, may play a central role in shaping the evolution of tax multipliers in Japan.