State-Dependent Macroeconomic Effects of Tax Changes

This paper estimates a state-dependent model where the state of the economy is measured by the unemployment rate, economic growth, and uncertainty. We find larger tax multipliers in low unemployment states and during expansions. However, tax multipliers are smaller when uncertainty is low. Results are robust to many alternative specifications. We show that this nonlinearity in the output responses is driven by lumpy investment. Moreover, given the current state of the U.S. economy and using our estimates, we project the near-term growth impact of the TCJA and predict the level of GDP to be 2.06 percent higher by 2020