A Deep Dive into Tax Buoyancy: Comparing Estimation Techniques in a Large Heterogeneous Panel

By Antoine Cornevin, Juan S Corrales, Juan Pablo Angel

March 17, 2023

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Antoine Cornevin, Juan S Corrales, and Juan Pablo Angel. A Deep Dive into Tax Buoyancy: Comparing Estimation Techniques in a Large Heterogeneous Panel, (USA: International Monetary Fund, 2023) accessed December 21, 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 provides new empirical evidence on tax buoyancy (tax revenues responsiveness to changes in economic activity) over the period 1990-2020 using a large panel of 185 countries. This study compares short-term and long-term buoyancy coefficients for total tax revenues and different individual taxes by reviewing and contrasting a range of estimators. Our results broadly confirm the main body of the literature on long-term buoyancy hovering around one. We find evidence of lower estimates for short-term buoyancy relative to previous literature, suggesting a limited automatic stabilization power of taxes. As a robustness exercise, in addition to changes in tax rates, we introduce novel control variables for tax exemptions and bases to disentangle discretionary from automatic tax revenue changes. The marginal changes in the results when controlling for policy actions suggest that, on average, the economic cycle does not necessarily influence tax reforms.

Subject: Corporate income tax, Income tax systems, Personal income tax, Revenue administration, Taxes, Value-added tax

Keywords: Automatic stabilization, Buoyancy coefficient, Buoyancy estimate, Common correlated effect, Comparing estimation technique, Corporate income tax, Cross-sectional dependence, DFE estimator, Fiscal sustainability, Global, Income tax systems, MG estimator, Personal income tax, Tax buoyancy, Tax elasticity, Value-added tax

Publication Details

Pages:

72
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/071
Stock No:

WPIEA2023071
ISBN:

9798400238376
ISSN:

1018-5941

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