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Europe > Iceland

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  • Type: Journal Issue x
  • Efficiency; Optimal Taxation x
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Cover IMF Working Papers
Tax Revenue Response to the Business Cycle
Ms. Cemile Sancak
,
Jing Xing
, and
Ricardo Velloso
This paper examines tax revenue during the business cycle by estimating the relationship between tax revenue efficiency and the output gap. We find a positive and significant relationship between these variables; results are consistent for quarterly and annual data, and across advanced and developing economies. We also find that a worsening (improvement) in the VAT C-efficiency is driven by shifts in consumption patterns and changes in tax evasion during contractions (expansions). A key implication is that, particularly during major economic booms and downturns, policy makers should look beyond simple, long-run revenue elasticities and incorporate into their analysis the effects of the economic cycle on tax revenue efficiency.
Keywords:
WP; tax revenue; output gap coefficient; tax revenue forecasting; business cycle; tax revenue efficiency; C-efficiency; VAT elasticity; VAT C-efficiency; estimation result; output gap variable; Value-added tax; Output gap; Tax efficiency; Consumption; Baltics