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Growth and Volatility of Tax Revenues in Latin America

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  • Hans Fricke
  • Bernd Süssmuth

Abstract

Against the background of a notoriously high macroeconomic instability and the need to raise tax revenues to meet the demands of public spending, this paper analyzes the tradeoff between growth and volatility of tax revenues in Latin America. We use a two-step Engle-Granger-type model to estimate short-run and long-run elasticities, accounting for state-dependent asymmetric reactions of short-run elasticities over the business cycle. Due to its dependence on commodities exploitation Latin America is in general susceptible to the boom-bust cycles of its natural riches. Controlling for the composition of revenue sources and other idiosyncrasies of Latin American economies, we find revenues above (below) its long-run equilibrium to react stronger (weaker) to business cycle dynamics. This "tax revenue channel" represents an indirect argument for counter-cyclical discretionary fiscal policy in the region. Our detailed elasticity estimates can give some orientation on how to reach necessary higher tax levels without creating disincentives and inequities through business cycle instabilities on the way to develop an adequate internal tax system.

Suggested Citation

  • Hans Fricke & Bernd Süssmuth, 2011. "Growth and Volatility of Tax Revenues in Latin America," CESifo Working Paper Series 3312, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3312
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    Cited by:

    1. Bruno Martorano, 2016. "Taxation and inequality in developing countries: Lessons from the recent experience of Latin America," WIDER Working Paper Series 098, World Institute for Development Economic Research (UNU-WIDER).
    2. Koester, Gerrit & Priesmeier, Christoph, 2017. "Revenue elasticities in euro area countries," Working Paper Series 1989, European Central Bank.
    3. Richard M. Bird & Michael Smart, 2012. "Financing Social Expenditures in Developing Countries: Payroll or Value Added Taxes?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1206, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    4. Joshua Aizenman & Yothin Jinjarak & Jungsuk Kim & Donghyun Park, 2015. "Tax Revenue Trends in Asia and Latin America: A Comparative Analysis," NBER Working Papers 21755, National Bureau of Economic Research, Inc.
    5. Raffaele Lagravinese & Paolo Liberati & Agnese Sacchi, 2016. "The growth and variability of local taxes: An application to the Italian regions," Working Papers. Collection B: Regional and sectoral economics 1601, Universidade de Vigo, GEN - Governance and Economics research Network.
    6. repec:taf:applec:v:48:y:2016:i:60:p:5866-5881 is not listed on IDEAS
    7. Bruno Martorano, 2016. "Taxation and inequality in developing countries: Lessons from the recent experience of Latin America," WIDER Working Paper Series 098, World Institute for Development Economic Research (UNU-WIDER).
    8. repec:rfh:bbejor:v:6:y:2017:i:1:p:28-34 is not listed on IDEAS
    9. Le, Tuan Minh & Moreno-Dodson, Blanca & Bayraktar, Nihal, 2012. "Tax capacity and tax effort : extended cross-country analysis from 1994 to 2009," Policy Research Working Paper Series 6252, The World Bank.
    10. Tomas Havranek & Zuzana Irsova & Jiri Schwarz, 2016. "Dynamic elasticities of tax revenue: evidence from the Czech Republic," Applied Economics, Taylor & Francis Journals, vol. 48(60), pages 5866-5881, December.
    11. Koester, Gerrit B. & Priesmeier, Christoph, 2012. "Estimating dynamic tax revenue elasticities for Germany," Discussion Papers 23/2012, Deutsche Bundesbank.

    More about this item

    Keywords

    tax policy; developing countries; regime-dependent elasticity;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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