Tax Reforms and Fiscal Shock Smoothing

By David Amaglobeli, Laura Jaramillo, Pooja Karnane, Aleksandra Zdzienicka

May 23, 2019

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David Amaglobeli, Laura Jaramillo, Pooja Karnane, and Aleksandra Zdzienicka. Tax Reforms and Fiscal Shock Smoothing, (USA: International Monetary Fund, 2019) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the role of tax policy reforms in enhancing fiscal shock smoothing in a panel of 13 OECD economies during the period 1980-2017. The results suggest that tax reforms, in particular those that broaden the tax base, significantly enhance the ability of fiscal policy to mitigate the impact of growth shocks on disposable income. We find that the magnitude of shock smoothing increases from an average of 2 percent to 3-3½ percent following the reform. The effects are considerably higher for tax base than tax rate changes, and also higher for indirect tax than direct tax changes. The effects are symmetric—that is, the increase in shock smoothing following a reform expanding the tax base (rate) is similar to the decline in shock smoothing after a reform narrowing the tax base (rate). Tax elasticity, collection efficiency, and the progressivity of the tax system are important channels through which tax reforms affect fiscal stabilization.

Subject: Consumption taxes, Fiscal policy, Income and capital gains taxes, Personal income tax, Value-added tax

Keywords: Indirect tax, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/113
Stock No:

WPIEA2019113
ISBN:

9781498315623
ISSN:

1018-5941

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