The Stability of Tax Elasticities Over the Business Cycle in European Countries

44 Pages Posted: 12 May 2017

See all articles by Melisso Boschi

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA)

Stefano d'Addona

University of Roma Tre

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2017

Abstract

The change of national income brings about tax revenue change. This relationship is embodied in the tax elasticity and usefully estimated both for the long-run and the short-run. In this paper we show that the short-run tax elasticity - the percent change in the tax revenue in response to a one percent change in national income - changes itself according to the business cycle. Using a novel dataset of tax policy reforms on 15 European countries from 1980 to 2013, we estimate a two state Markov-switching regression model to account for possible differences in tax elasticities during different phases of the economy. The estimated difference between elasticities during booms and recessions turns out to be always statistically significant and often even economically so. Results show a clear tendency for short-run elasticities of (i) indirect taxes, (ii) social contributions, and to a lesser extent, (iii) corporate income taxes to increase in recessions. Differences in tax elasticities for personal income taxes are somehow less pronounced. Across countries, results show a tendency for larger elasticities in recessions to prevail.

Keywords: Tax elasticity, Tax policy discretionary change, Business cycle, European economy, Markov-switching regimes

JEL Classification: C24, C29, E32, E62, H20, H30

Suggested Citation

Boschi, Melisso and d'Addona, Stefano, The Stability of Tax Elasticities Over the Business Cycle in European Countries (May 11, 2017). Available at SSRN: https://ssrn.com/abstract=2967524 or http://dx.doi.org/10.2139/ssrn.2967524

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Stefano D'Addona (Contact Author)

University of Roma Tre ( email )

Via Chiabrera, 199
Rome, 00145
Italy

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