Growth and Volatility of Tax Revenues in Latin America
AbstractAgainst 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.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3312.
Date of creation: 2011
Date of revision:
tax policy; developing countries; regime-dependent elasticity;
Find related papers by JEL classification:
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
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- Luiz de Mello & Diego Moccero, 2006. "Brazil's Fiscal Stance during 1995-2005: The Effect of Indebtedness on Fiscal Policy Over the Business Cycle," OECD Economics Department Working Papers 485, OECD Publishing.
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