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Explaining Output Volatility: the Case of Taxation

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Olaf Posch ()

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Abstract

This paper studies the determinants of output volatility in OECD countries to shed light on the sources of the observed heterogenous patterns. For this purpose, we derive tax effects on the variance of output in a stochastic version of the Ramsey model. Using panel data methods we find that effective tax rates à la Mendoza et al. (1994) are indeed (Huber) robust and substantial in explaining output volatility. Together with other controls they account for roughly two third of its variation. Taxes on labor and corporate income are found to be negatively related to macroeconomic volatility whereas the capital income tax has the opposite effect. No clear evidence is found that tax reforms account for the moderation in the U.S. while for the UK changes in tax rates can explain three quarter of the moderation from the 1980s to the 1990s.

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Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 20608.

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Date of creation: Aug 2006
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Handle: RePEc:ham:qmwops:20608

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Related research
Keywords: Output volatility; Stochastic models; Tax effects; Natural volatility;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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