The business cycle state‐dependent effects of tax news: A joint‐state analysis

Abstract This paper examines how the interaction of business cycles with the source of fluctuations and macroeconomic uncertainty shapes the impact of tax news on output. Using tax news from the municipal bond market and a smooth transition local projection, we find anticipated tax cuts are more contractionary in supply‐driven than demand‐driven recessions, and in high‐uncertainty than low‐uncertainty recessions. High market congestion in supply‐driven recessions and elevated real option values in high‐uncertainty recessions contribute to these stronger contractionary effects. The findings suggest that countercyclical tax policies may have unintended impacts during anticipation periods, depending on business cycle sources and uncertainty levels.