Growth and Volatility of Tax Revenues in Latin America

Abstract

Against the background of a notoriously high macroeconomic instability and the need to raise tax revenues to meet the demands of public spending, this paper analyzes the tradeoff between growth and volatility of tax revenues in Latin America. We use a two-step Engle-Granger-type model to estimate short-run and long-run elasticities, accounting for statedependent asymmetric reactions of short-run elasticities over the business cycle. Due to its dependence on commodities exploitation Latin America is in general susceptible to the boombust cycles of its natural riches. Controlling for the composition of revenue sources and other idiosyncrasies of Latin American economies, we find revenues above (below) its long-run equilibrium to react stronger (weaker) to business cycle dynamics. This "tax revenue channel" represents an indirect argument for counter-cyclical discretionary fiscal policy in the region. Our detailed elasticity estimates can give some orientation on how to reach necessary higher tax levels without creating disincentives and inequities through business cycle instabilities on the way to develop an adequate internal tax system.

Dynamic elasticities of tax revenue: evidence from the Czech Republic

“…Koester & Priesmeier (2012) with German data obtain 0.79 for value added tax, 0.77 for profit tax, and 1.75 for wage tax. Moreover, Machado & Zuloeta (2012) and Fricke & Süssmuth (2014) estimate elasticities for Latin American countries and obtain long-run value added tax revenue elasticity estimates between 1.4 and 2.6, personal income tax elasticity between 0.9 and 3.0, and corporate income tax elasticity in the range 1.3-3.8. All of these papers use revenue data adjusted for tax reforms and tax policy changes, which is a necessary condition for estimating correct tax revenue elasticities, as we have already noted and will explain in the next section in more detail.…”

Comparing Risk Components of Taxation Systems of Italy and the Russian Federation

“…& Nelson R.D. : 2010), as well as to add to the calculation of economic growth elasticity depending on the volatility of the collected taxes (Felix R.A.: 2008;Fricke H. & Süssmuth B.). Moreover, in some research VaR is used as a basis for defining the amount of insurance fund in case of crisis and cut in tax revenue (Salin V. & Patron E. & Stallmann J. I.: 2004).…”

Influence of the Industrial Structure of Economy on the Risk Level of Russian Regions' Tax Systems

“…Some of them examine interrelationship of tax systems volatility with economic growth (Fricke and Süssmuth, 2014;Cornia and Nelson, 2010) or economic cyclicality (Kodrzycki, 2014). Usually these dependencies are considered at the macro level without structural analysis.…”