Taxes and the Fed: Theory and Evidence from Equities
Working Paper with Anthony M. Diercks
- Proceedings:
- - 2016 Financial Management Association Annual Meeting
- - 2016 Midwest Finance Association Annual Meeting
- - 2015 Eastern Finance Association Annual Meeting
- Press Coverage:
- -"Why the Disney deal suggests the tax bill may mean little for the economy" by Ryan Vlastelica, MarketWatch (16 December 2017)
- -"The Fed Versus Tax Cuts" by Justin Lahart, Wall Street Journal (12 December 2017)
- -"Fed Study Suggests Trump May Have Fed to Thank for Stock Rally" by Matthew Boesler, Bloomberg (12 October 2017)
We provide a critical theoretical and empirical analysis that suggests a key driver of fiscal effects on equity markets is the Federal Reserve. For the Post-1980 era, tax cuts lead to higher cash flow news and higher discount rates. The discount rate news tends to dominate such that tax cuts are associated with lower equity returns. For the Pre-1980 era, the results flip. This empirical instability is confirmed across multiple measures of tax shocks at different frequencies. We motivate our empirical findings with a standard New Keynesian model that exhibits a shift in the aggressiveness of monetary policy.
Last Updated: 31 August 2018