Growth and Volatility of Tax Revenues in Latin America

32 Pages Posted: 1 Feb 2011

See all articles by Hans Fricke

Hans Fricke

University of St. Gallen - Swiss Institute for Empirical Economic Research; Stanford University

Bernd Süssmuth

University of Leipzig; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 31, 2011

Abstract

Against the background of a notoriously high macroeconomic instability and the need to raise tax revenues to meet the demands of public spending, this paper analyzes the tradeoff between growth and volatility of tax revenues in Latin America. We use a two-step Engle-Granger-type model to estimate short-run and long-run elasticities, accounting for state-dependent asymmetric reactions of short-run elasticities over the business cycle. Due to its dependence on commodities exploitation Latin America is in general susceptible to the boom-bust cycles of its natural riches. Controlling for the composition of revenue sources and other idiosyncrasies of Latin American economies, we find revenues above (below) its long-run equilibrium to react stronger (weaker) to business cycle dynamics. This “tax revenue channel” represents an indirect argument for counter-cyclical discretionary fiscal policy in the region. Our detailed elasticity estimates can give some orientation on how to reach necessary higher tax levels without creating disincentives and inequities through business cycle instabilities on the way to develop an adequate internal tax system.

Keywords: Tax Policy, Developing Countries, Regime-Dependent Elasticity

JEL Classification: H20, O10, E60

Suggested Citation

Fricke, Hans and Süssmuth, Bernd, Growth and Volatility of Tax Revenues in Latin America (January 31, 2011). CESifo Working Paper Series No. 3312, Available at SSRN: https://ssrn.com/abstract=1752117

Hans Fricke

University of St. Gallen - Swiss Institute for Empirical Economic Research ( email )

Varnbüelstr. 14
St.Gallen, CH-9000
Switzerland

Stanford University ( email )

Stanford, CA 94305
United States

Bernd Süssmuth (Contact Author)

University of Leipzig ( email )

IEW Institute for Empirical Research in Economics
Grimmaische Str. 12
Leipzig, D-04109
Germany
+49 341 97 33782 (Phone)
+49 341 97 33789 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/iew/professur-oekonometrie/team/prof-dr-bernd-suessmuth.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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