Tax Revenue Response to the Business Cycle

Tax Revenue Response to the Business Cycle

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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.In the absence of hard data ... senior business leaders, who are asked to evaluate current and expected competitiveness conditions in the country where they work. ... 21 Data source: International Country Risk Guide (ICRG) country risk data.

Title:Tax Revenue Response to the Business Cycle
Author:Ms. Cemile Sancak, Jing Xing, Ricardo Velloso
Publisher:International Monetary Fund - 2010-03-01


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