Average tax rate cyclicality in OECD countries: A test of three fiscal policy theories
AbstractThis paper investigates the cyclical properties of the average effective tax rate in 26 OECD countries over 1965-2003 in order to test the validity of three theories of fiscal policy: (i) the standard Keynesian theory which recommends that tax policy should be counter-cyclical, (ii) the Tax Smoothing hypothesis, which implies that changes in GDP should be uncorrelated with tax rates, and (iii) the positive theory of Battaglini and Coate (2008) which predicts that the average tax rate should be negatively correlated with GDP. Our main finding is that the correlations of tax rates with cyclical GDP are generally quite small and statistically indistinguishable from zero. This finding is quite robust and is more consistent with the implications of the Tax Smoothing hypothesis than either the recommendations of the standard Keynesian model or the predictions of Battaglini and Coate’s theory.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 22208.
Date of creation: 07 Apr 2010
Date of revision:
Fiscal Policy; Tax Rates; Business Cycle;
Other versions of this item:
- Davide Furceri & Georgios Karras, 2011. "Average Tax Rate Cyclicality in OECD Countries: A Test of Three Fiscal Policy Theories," Southern Economic Journal, Southern Economic Association, vol. 77(4), pages 958-972, April.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-04-24 (Accounting & Auditing)
- NEP-ALL-2010-04-24 (All new papers)
- NEP-MAC-2010-04-24 (Macroeconomics)
- NEP-PBE-2010-04-24 (Public Economics)
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