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

45 Pages Posted: 24 Jul 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: July 19, 2017

Abstract

We estimate short- and long-run tax elasticities that capture the relationship between changes in national income and tax revenue. We show that the short-run tax elasticity changes according to the business cycle. We estimate a two state Markov-switching regression on a novel dataset of tax policy reforms in 15 European countries from 1980 to 2013, showing that the elasticities during booms and recessions are statistically (and often economically) different. The elasticities of (i) indirect taxes, (ii) social contributions, and (iii) corporate income taxes, tend to be larger during recessions. Tax elasticities for personal income tend to be more stable across the regimes. Estimates of long-run elasticities are in line with existing literature.

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 (July 19, 2017). CAMA Working Paper No. 44/2017. Available at SSRN: https://ssrn.com/abstract=3005694 or http://dx.doi.org/10.2139/ssrn.3005694

Melisso Boschi (Contact Author)

Centre for Applied Macroeconomic Analysis (CAMA) ( email )

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

Stefano D'Addona

University of Roma Tre ( email )

Via Chiabrera, 199
Rome, 00145
Italy

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