  This paper examines the short- and long-run effects of U.S. federal personal
income and corporate income tax cuts on a wide array of economic policy
variables in a data-rich environment. Using a panel of U.S. macroeconomic data
set, made up of 132 quarterly macroeconomic series for 1959-2018, the study
estimates factor-augmented vector autoregression (FAVARs) models where an
extended narrative tax changes dataset combined with unobserved factors. The
narrative approach classifies if tax changes are exogenous or endogenous. This
paper identifies narrative tax shocks in the vector autoregression model using
the sign restrictions with Uhlig's (2005) penalty function. Empirical findings
show a significant expansionary effect of tax cuts on the macroeconomic
variables. Cuts in personal and corporate income taxes cause a rise in output,
investment, employment, and consumption; however, cuts in personal taxes appear
to be a more effective fiscal policy tool than the cut in corporate income
taxes. Real GDP, employment, investment, and industrial production increase
significantly and reach their maximum response values two years after personal
income tax cuts. The effects of corporate tax cuts have relatively smaller
effects on output and consumption but show immediate and higher effects on
fixed investment and price levels.
