THE MACROECONOMIC EFFECTS OF DISTORTIONARY TAXATION

Prescott (1986) estimates that technology shocks account for 75% of th e fluctuations in the postwar U.S. economy. This paper reestimates the contribution of technological change for a standard business cycle mo del that includes a public sector and fiscal disturbances. I find that a significant fraction of the variance of aggregate consumption, inve stment, output, capital stock, and hours of work can be explained by d isturbances in labor and capital tax rates and government consumption. I also use the model to quantify the welfare costs of capital and lab or taxation. For both the time series and welfare calculations, maximu m likelihood estimates of taste, technology, and policy parameters are used.