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Discretionary measures and tax revenues in the run-up to the financial crisis

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Author Info

  • Salvador Barrios
  • Raffaele Fargnoli

Abstract

Summary for non-specialistsThis paper examines the influence of governments' discretionary measures on tax revenues and tax elasticity in the European Union during the run-up to the 2008/2009 global financial crisis which was characterised by large swings in tax revenues.Using data collected in the context of the Output Gap Working Group of the Economic Policy Committee we show that while discretionary measures have had a limited impact on tax yields, they have in some cases significantly affected tax elasticities and thereby altered the relationship between tax revenues and the business cycle which plays a key role in the EU fiscal surveillance framework. Furthermore we provide evidence on the pro-cyclical nature of discretionary measures affecting tax revenues whereby governments tend to implement tax cuts during expansionary phases while resorting to tax increases during slowdowns. More generally our results suggest that the availability of detailed projections on the impact of discretionary measures by broad tax category would be instrumental to a better monitoring of tax revenues developments in the EU in order to better identify the role played by non-policy factors (such as asset prices) in driving tax revenues. Given that the time span covered by this database is in most cases still relatively short (covering on average 7 to 8 years) future updates of the data would allow to further dig into the issue of the influence of discretionary measures on tax elasticities as well as to provide elements for a backward assessment of fiscal plans vs. outcome.

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File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2010/pdf/ecp419_en.pdf
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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 419.

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Length: 32 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:euf:ecopap:0419

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Related research

Keywords: financial crisis barrios Taxation discretionary measures fiscal policy financial crisis fiscal stance business cycle Fargnoli;

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Cited by:
  1. Leon Bettendorf & Duncan van Limbergen, 2013. "The stability of tax elasticities in The Netherlands," CPB Discussion Paper 256, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Árpád Kovács & Péter Halmosi, 2012. "Similarities and Differences in European Crisis Management," Public Finance Quarterly, State Audit Office of Hungary, vol. 57(1), pages 9-27.

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