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Macroeconomic effects of tax rate and base changes: Evidence from fiscal consolidations

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  • Dabla-Norris, Era
  • Lima, Frederico

Abstract

This paper examines the macroeconomic effects of tax changes during fiscal consolidations. We build a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected yield, motivation, and announcement and implementation dates of more than 2000 tax measures across 10 OECD countries. Using this data, we then analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further differentiating between changes in personal income, corporate income, and value added taxes. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.

Suggested Citation

  • Dabla-Norris, Era & Lima, Frederico, 2023. "Macroeconomic effects of tax rate and base changes: Evidence from fiscal consolidations," European Economic Review, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:eecrev:v:153:y:2023:i:c:s0014292123000284
    DOI: 10.1016/j.euroecorev.2023.104399
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    More about this item

    Keywords

    Tax multiplier; Tax base; Tax rate; Narrative;
    All these keywords.

    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; Modern Monetary Theory
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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