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Average Tax Rate Cyclicality in OECD Countries: A Test of Three Fiscal Policy Theories

  • Davide Furceri

    ()

    (OECD, 2 rue Andre Pascal, 75775 Paris Cedex 16)

  • Georgios Karras

    ()

    (University of Illinois at Chicago, Department of Economics, 601 South Morgan Street, Chicago, IL 60607, USA)

This article investigates the cyclical properties of the average effective tax rate in 26 OECD countries over 1965–2003 to test the validity of three theories of fiscal policy: (i) the standard Keynesian theory, which recommends that tax policy should be countercyclical; (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 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 predictions of the political economy theory of Battaglini and Coate.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2011)
Issue (Month): 4 (April)
Pages: 958-972

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Handle: RePEc:sej:ancoec:v:77:4:y:2011:p:958-972
Contact details of provider: Web page: http://www.southerneconomic.org/

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  1. Torsten Persson, 2001. "Do Political Institutions Shape Economic Policy?," NBER Working Papers 8214, National Bureau of Economic Research, Inc.
  2. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
  3. Torsten Persson & Guido Tabellini, 2001. "Political Institutions and Policy Outcomes: What are the Stylized Facts?," Temi di discussione (Economic working papers) 412, Bank of Italy, Economic Research and International Relations Area.
  4. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  5. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  6. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  7. Barseghyan, Levon & Battaglini, Marco & Coate, Stephen, 2013. "Fiscal policy over the real business cycle: A positive theory," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2223-2265.
  8. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  9. Pierre-Olivier Beffy & Patrice Ollivaud & Pete Richardson & Franck Sédillot, 2006. "New OECD Methods for Supply-side and Medium-term Assessments: A Capital Services Approach," OECD Economics Department Working Papers 482, OECD Publishing.
  10. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  11. Bennett Sutton & Luis Catão, 2002. "Sovereign Defaults; The Role of Volatility," IMF Working Papers 02/149, International Monetary Fund.
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