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Explaining output volatility: The case of taxation

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  • Olaf Posch

    ()
    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Abstract

This paper studies the effects of taxation on output volatility in OECD countries to shed light on the sources of observed heterogeneity over time and across countries. To this end, we derive tax effects on macro aggregates in a stochastic neoclassical model. As a result, taxes are shown to affect the second moment of output growth rates without (long-run) effects on the first moment. Taking the model to the data, we exploit observed heterogeneity patterns to estimate effects of tax rates on macro volatility using panel estimation, explicitly modeling the unobserved variance process. We find a strong empirical link between effective tax rates and output volatility, with some evidence of a cointegrating relationship. In accordance with theory, taxes on labor income and corporate income empirically are found to be negatively related to volatility of macro aggregates whereas the capital tax ratio has positive effects.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2008-04.

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Length: 73
Date of creation: 18 Jan 2008
Date of revision:
Handle: RePEc:aah:create:2008-04

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Web page: http://www.econ.au.dk/afn/

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Keywords: Macroeconomic volatility; Tax effects; Big moderation;

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Citations

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Cited by:
  1. Yu-Fu Chen & Michael Funke, 2010. "Booms, Recessions And Financial Turmoil: A Fresh Look At Investment Decisions Under Cyclical Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 57(s1), pages 290-317, 07.
  2. Posch, Olaf & Wälde, Klaus, 2005. "Natural volatility, welfare and taxation," W.E.P. - Würzburg Economic Papers, University of Würzburg, Chair for Monetary Policy and International Economics 57, University of Würzburg, Chair for Monetary Policy and International Economics.
  3. Andrey Launov & Olaf Posch & Klaus Wälde, 2012. "On the estimation of the volatility-growth link," CREATES Research Papers, School of Economics and Management, University of Aarhus 2012-21, School of Economics and Management, University of Aarhus.
  4. Olaf Posch & Klaus Wälde, 2010. "On the Non-Causal Link between Volatility and Growth," Working Papers, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz 1002, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 08 Mar 2010.
  5. Olaf Posch, 2007. "Structural estimation of jump-diffusion processes in macroeconomics," CREATES Research Papers, School of Economics and Management, University of Aarhus 2007-23, School of Economics and Management, University of Aarhus.
  6. Olaf Posch & Klaus Wälde, 2011. "On the link between volatility and growth," Journal of Economic Growth, Springer, Springer, vol. 16(4), pages 285-308, December.
  7. Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series, European Central Bank 1380, European Central Bank.
  8. Spiliopoulos, Leonidas, 2010. "The determinants of macroeconomic volatility: A Bayesian model averaging approach," MPRA Paper 26832, University Library of Munich, Germany.
  9. Veraart, Almut E.D., 2010. "Inference For The Jump Part Of Quadratic Variation Of Itô Semimartingales," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 26(02), pages 331-368, April.
  10. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-31, Scottish Institute for Research in Economics (SIRE).
  11. Robert Feicht & Wolfgang Stummer, 2010. "Complete Closed-form Solution to a Stochastic Growth Model and Corresponding Speed of Economic Recovery preliminary," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c015_041, DEGIT, Dynamics, Economic Growth, and International Trade.

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