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The Stability of Tax Elasticities over the Business Cycle in European Countries

Author

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  • Melisso Boschi
  • Stefano d'Addona

Abstract

We estimate short- and long-run tax elasticities that capture the relationship between changes in national income and tax revenue. We show that the short-run tax elasticity changes according to the business cycle. We estimate a two state Markov-switching regression on a novel dataset of tax policy reforms in 15 European countries from 1980 to 2013, showing that the elasticities during booms and recessions are statistically (and often economically) different. The elasticities of (i) indirect taxes, (ii) social contributions, and (iii) corporate income taxes, tend to be larger during recessions. Tax elasticities for personal income tend to be more stable across the regimes. Estimates of long-run elasticities are in line with existing literature.

Suggested Citation

  • Melisso Boschi & Stefano d'Addona, 2017. "The Stability of Tax Elasticities over the Business Cycle in European Countries," CAMA Working Papers 2017-44, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2017-44
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-02/44_2017_boschi_daddona.pdf
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    Cited by:

    1. Esteban García-Mirallas & Maximilian Freier & Sara Riscao & Chrysa Leventi & Alberto Mazzon & Glenn Abela & Laura Boyd & Baiba Brusbārde & Marion Cochard & David Cornille & Emanuele Dicarlo & Ian Deba, 2025. "Fiscal drag in theory and practice: a European perspective," Working Paper Research 483, National Bank of Belgium.
    2. Deli, Yota & Rodriguez, Abian Garcia & Kostarakos, Ilias & Varthalitis, Petros, 2018. "Dynamic tax revenue buoyancy estimates for a panel of OECD countries," Papers WP592, Economic and Social Research Institute (ESRI).
    3. Bernd Hayo & Sascha Mierzwa & Umut Unal, 2021. "Estimating Policy-Corrected Long-Term and Short-Term Tax Elasticities for the United States, Germany, and the United Kingdom," MAGKS Papers on Economics 202112, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    4. Karolina Konopczak & Aleksander Łożykowski, 2021. "Efekt fiskalny uszczelniania systemu podatkowego w Polsce: próba oszacowania w zakresie podatku CIT," Ekonomista, Polskie Towarzystwo Ekonomiczne, issue 1, pages 25-55.
    5. Fotini Economou & Ioanna Kountouri & Yannis Panagopoulos & Georgia Skintzi & Ekaterini Tsouma, 2022. "Estimating excise tax revenue elasticity and buoyancy for tobacco products and alcoholic beverages: evidence from Greece," Applied Economics, Taylor & Francis Journals, vol. 54(39), pages 4557-4576, August.
    6. Roudari, Soheil & Homayounifar, Masoud & Salimifar, Mostafa, 2019. "بررسی همبستگی میان نوسانات نرخ ارز، نوسانات مخارج جاری دولت و بدهی دولت به شبکه بانکی با تاکید بر مقیاس-زمان [Investigating the correlation between exchange rate fluctuations, current government ex," MPRA Paper 127019, University Library of Munich, Germany, revised 29 Apr 2020.
    7. Plamen Nikolov & Paolo Pasimeni, 2023. "Fiscal Stabilization in the United States: Lessons for Monetary Unions," Open Economies Review, Springer, vol. 34(1), pages 113-153, February.
    8. Amélie Barbier-Gauchard & Kea Baret & Alexandru Minea, 2021. "National fiscal rules and fiscal discipline in the European Union," Applied Economics, Taylor & Francis Journals, vol. 53(20), pages 2337-2359, April.
    9. Konopczak, Karolina, . "Zmiany luki VAT w Polsce: rola czynników koniunkturalnych i strukturalnych," Gospodarka Narodowa-The Polish Journal of Economics, Szkoła Główna Handlowa w Warszawie / SGH Warsaw School of Economics, vol. 2022(1).
    10. Karolina Konopczak & Aleksander Łożykowski, 2021. "Efekt fiskalny uszczelniania systemu podatkowego w Polsce: próba oszacowania w zakresie podatku CIT," Ekonomista, Polskie Towarzystwo Ekonomiczne, vol. 1, pages 25-55, January.
    11. Kéa Baret & Amélie Barbier-Gauchard & Théophilos Papadimitriou, 2021. "Forecasting the Stability and Growth Pact compliance using Machine Learning," Working Papers of BETA 2021-01, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    12. Jadranka Đurović Todorović & Marina Đorđević & Vera Mirović & Branimir Kalaš & Nataša Pavlović, 2024. "Modeling Tax Revenue Determinants: The Case of Visegrad Group Countries," Economies, MDPI, vol. 12(6), pages 1-15, May.
    13. Robert Kelm, 2022. "Determinants of the VAT Gap in EU Member States from 2000 to 2016," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 14(4), pages 225-262, December.
    14. Bernd Hayo & Sascha Mierzwa & Umut Ünal, 2023. "Estimating policy-corrected long-term and short-term tax elasticities for the USA, Germany, and the United Kingdom," Empirical Economics, Springer, vol. 64(1), pages 465-504, January.
    15. Charalambos Pattichis, 2022. "Are tax revenue elasticities consistent with a balanced government budget? An analysis and implications for six CEE countries," Economics and Business Letters, Oviedo University Press, vol. 11(1), pages 33-40.
    16. Cornevin, Antoine & Corrales, Juan Sebastian & Mojica, Juan Pablo Angel, 2024. "Do tax revenues track economic growth? Comparing panel data estimators," Economic Modelling, Elsevier, vol. 140(C).
    17. Gianluigi De Pascale & Mariantonietta Fiore & Francesco Contò, 2021. "Short and long run environmental tax buoyancy in EU-28: a panel study," International Economics, CEPII research center, issue 168, pages 1-9.
    18. Zhou, Shuya & Zhou, Peiyan & Ji, Hannah, 2022. "Can digital transformation alleviate corporate tax stickiness: The mediation effect of tax avoidance," Technological Forecasting and Social Change, Elsevier, vol. 184(C).
    19. Lagravinese, Raffaele & Liberati, Paolo & Sacchi, Agnese, 2020. "Tax buoyancy in OECD countries: New empirical evidence," Journal of Macroeconomics, Elsevier, vol. 63(C).
    20. Niall Conroy, 2023. "The Role of Elasticities in Forecasting Irish Income Tax Revenue," The Economic and Social Review, Economic and Social Studies, vol. 54(2), pages 149-172.

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    Keywords

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    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
    • 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
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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