When are tax multipliers large?

I show that the US tax multiplier depends on the direction of the tax change. The tax multiplier is significantly larger (in absolute value) for tax hikes than for tax cuts - regardless of whether I identify tax shocks via (i) the narrative approach or (ii) sign restrictions. The tax hike multiplier is strongly pro-cyclical, i.e., substantially larger in expansions. Variation in the tax cut multiplier over the business cycle is milder and statistically insignificant. A simple business cycle model with downward nominal wage rigidities can explain these results.

Automated summary

The US tax multiplier is larger for tax hikes than for tax cuts, and this difference is consistent regardless of the method used to identify tax shocks. Moreover, the tax hike multiplier is pro-cyclical, being substantially larger during economic expansions. In contrast, the variation in the tax cut multiplier over the business cycle is milder and statistically insignificant. These results can be explained by a simple business cycle model incorporating downward nominal wage rigidities.