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Tax elasticity to business cycle: an overview of three taxes from 1979 to 2013 in France

Author

Listed:
  • Q. LAFFÉTER

    (Insee)

  • M. PAK

    (Insee)

Abstract

Taxes in France have not always increased as anticipated, since tax revenue was sometimes higher than expected, for instance during the jackpot episode in 1999, or lower than expected, in 2009 and more recently in 2013. The purpose of this study is to examine the sensitivity of the three main State taxes in France to the business cycle over the 1979-2013 period: the personal income tax (PIT), the value added tax (VAT), and the corporate income tax (CIT). First these taxes need to be corrected for the effects of discretionary measures, which partly influence how taxes grow. Second, the elasticities of these taxes, broadly measured under an unchanged tax system, are estimated. Starting with a simple model to estimate the instantaneous elasticity of each tax to GDP, more complex specifications relying on the existing literature are then tested, in order to acknowledge sensitivity of each tax to the economic environment. According to our results, PIT revenues instantaneous elasticity to an activity shock is almost equal to one if annual inflation adjustments are considered as automatic rather than discretionary. VAT revenues behave almost in a similar way. However this response to activity is slightly stronger when stemming from a shock on volume rather than a shock on price. The CIT is a tax based on the previous year, but it is very sensitive to instantaneous shock, thus acting as a stabilizer. It is also sensitive to asset prices.

Suggested Citation

  • Q. Lafféter & M. Pak, 2015. "Tax elasticity to business cycle: an overview of three taxes from 1979 to 2013 in France," Documents de Travail de l'Insee - INSEE Working Papers g2015-08, Institut National de la Statistique et des Etudes Economiques.
  • Handle: RePEc:nse:doctra:g2015-08
    as

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    File URL: https://www.insee.fr/fr/statistiques/fichier/1381063/G2015-08.pdf
    File Function: Document de travail de la DESE numéro G2015-08
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    References listed on IDEAS

    as
    1. Robert Price & Thai-Thanh Dang & Yvan Guillemette, 2014. "New Tax and Expenditure Elasticity Estimates for EU Budget Surveillance," OECD Economics Department Working Papers 1174, OECD Publishing.
    2. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
    3. Salvador Barrios & Raffaele Fargnoli, 2010. "Discretionary measures and tax revenues in the run-up to the financial crisis," European Economy - Economic Papers 2008 - 2015 419, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Savina Princen & Gilles Mourre & Dario Paternoster & George-Marian Isbasoiu, 2013. "Discretionary tax measures: pattern and impact on tax elasticities," European Economy - Economic Papers 2008 - 2015 499, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    5. David F. Hendry & Hans-Martin Krolzig, 1999. "Improving on 'Data mining reconsidered' by K.D. Hoover and S.J. Perez," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 202-219.
    6. Vincent Belinga & Dora Benedek & Ruud A. de Mooij & John Norregaard, 2014. "Tax Buoyancy in OECD Countries," IMF Working Papers 14/110, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    personal income tax; corporate income tax; VAT; discretionary measures; endogenous growth of tax receipts; tax elasticities;

    JEL classification:

    • 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
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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