TAX DISTURBANCES AND REAL ECONOMIC-ACTIVITY IN THE POSTWAR UNITED-STATES

This paper investigates the macroeconomic effects of cyclical fluctuat ions in marginal tax rates. It finds that systematically including tax variables in a standard real business cycle model substantially impro ves the model's ability to reproduce basic facts about postwar U.S. bu siness cycle fluctuations. In particular, modeling fluctuations in per sonal and corporate income tax rates increases the model's predicted r elative variability of hours and decreases its predicted correlation b etween hours and average productivity. Fluctuations in tax rates produ ce large substitution effects that alter the leisure/labor supply deci sion.