In S2 the cumulative output response of GDP is persistently negative in all countries
except Canada. In fact, there is again evidence of a decline in the effects of a tax cut
in S2, though weaker than in the case of spending shocks. Cumulative GDP falls in S2
relative to S1 in the US and UK at 1 and 3 years, and in Germany and Australia at 3 years. Like for spending shocks, the difference between S1 and S2 is large in the US, and
small in Australia. Except in Germany, the difference in the response between the two
subperiods is statistically significant.
The three countries with the smallest output elasticities of net taxes - Australia, the
UK and Germany - also display negative responses in the very first quarter in the whole
sample and in both subsamples (see Figure 3). As discussed, there are two reasons for