Discretionary Tax Changes and Macroeconomic Activity: New Narrative Evidence from Australia*

This paper investigates the effects of discretionary tax changes on economic activity in Australia. Using official records, including Budget Reports and Election Speeches, I construct a narrative‐based dataset that identifies the revenue impact, timing and motivation of all major Commonwealth tax policy changes from 1983Q4 to 2018Q4. This approach enables the identification of legislated tax changes that are unrelated to contemporaneous economic conditions. To estimate their macroeconomic effects, I use unanticipated exogenous tax changes as an instrument for tax revenue. The results indicate that tax cuts stimulate economic activity in the short run through consumption and investment; however, these gains are offset within 2 years due to contractionary monetary policy and a deterioration in the trade balance.