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Tax Revenue Response to the Business Cycle

  • Cemile Sancak
  • Jing Xing
  • Ricardo Velloso
Registered author(s):

    This paper examines tax revenue during the business cycle by estimating the relationship between tax revenue efficiency and the output gap. We find a positive and significant relationship between these variables; results are consistent for quarterly and annual data, and across advanced and developing economies. We also find that a worsening (improvement) in the VAT C-efficiency is driven by shifts in consumption patterns and changes in tax evasion during contractions (expansions). A key implication is that, particularly during major economic booms and downturns, policy makers should look beyond simple, long-run revenue elasticities and incorporate into their analysis the effects of the economic cycle on tax revenue efficiency.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=23715
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/71.

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    Length: 22
    Date of creation: 01 Mar 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/71
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    1. John Brondolo, 2009. "Collecting Taxes During an Economic Crisis; Challenges and Policy Options," IMF Staff Position Notes 2009/17, International Monetary Fund.
    2. Agha, Ali & Haughton, Jonathan, 1996. "Designing VAT Systems: Some Efficiency Considerations," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 303-08, May.
    3. Aizenman, Joshua & Jinjarak, Yothin, 2005. "The collection efficiency of the value added tax: theory and international evidence," Santa Cruz Department of Economics, Working Paper Series qt42d103zh, Department of Economics, UC Santa Cruz.
    4. Hongbin Cai & Qiao Liu, 2009. "Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms," Economic Journal, Royal Economic Society, vol. 119(537), pages 764-795, 04.
    5. Luiz de Mello, 2008. "Avoiding the Value Added Tax: Theory and Cross-Country Evidence," OECD Economics Department Working Papers 604, OECD Publishing.
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