The Revenue Effects of the Kennedy and Reagan Tax Cuts: Some Time Series Estimates

Univariate time series models are estimated for sample periods ending with the enactment of major tax reductions in 1964 and 1981. These models are used to forecast government revenue for the period following the tax cut, and the pattern of forecast errors is examined. Unforecast revenue is negative and large relative to its standard error following the 1981 tax cuts but is close to zero following the 1964 cuts. This disparity occurs because national output behaved differently in the two cases, suggesting that short-run movements in output are dominated by factors other than tax rate changes.