Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations

Abstract

This paper examines the macroeconomic effects of tax changes during fiscal consolidations. We build a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected revenue impact, motivation, and announcement and implementation dates of nearly 2,500 tax measures across 10 OECD countries. We analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further separating between changes in personal income, corporate income, and value added tax. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.

Fiscal Consolidations and Informality in Latin America and the Caribbean

“…Much work has followed and found that the contractionnary effect of fiscal consolidation is indeed important (Jordà and Taylor, 2016), especially in periods of low growth (Blanchard and Leigh, 2013;De-Long and Summers, 2012;Fatás and Summers, 2018). However, the empirical approach to study the fiscal multiplier has experienced a major shift with Romer and Romer (2010), who first introduced a narrative dataset of fiscal events, and this methodology has been widely adopted by the literature (as in Dabla-Norris and Lima, 2018;Amaglobeli et al, 2019). In this new approach, the exogeneity of the fiscal shock with respect to the business cycle is ensured by the selection of fiscal events based on their explicit motivation according to different official sources (government and international organizations reports, parliamentary documents or public discourses for example).…”

Regime-Dependent Environmental Tax Multipliers: Evidence from 75 Countries

“…5 The underlying assumption is that the feedback effect of output on tax revenues is controlled by a constant, country-specific output-gap elasticity. To obtain the cumulative multipliers of a permanent tax change, I use the local projection method proposed by Jordà (2005) and Jordà, Schularick, and Taylor (2015) and employed by Dabla-Norris and Lima (2018) to estimate dynamic multipliers for a country panel.…”

“…Noteworthy exceptions are Riera-Crichton, Vegh, and Vuletin (2016) and Gunter et al (2018) who estimate value-added tax multipliers. Dabla-Norris and Lima (2018) estimate personal income tax, corporate tax, and value-added tax multipliers and differentiate between tax rate and tax base changes. Yet, multipliers are assumed to be constant along the business cycle.…”

The value-added tax and growth: design matters

“…Dabla-Norris and Lima (2018) also investigate the macroeconomic effects (including output effect), separating effects of tax rate and base changes. Their result on the output effect of VAT rate indicates that an increase in a VAT rate has a negative and statistically significant impact on output in the short run.9 In contrast, Institute for Fiscal Studies (2011) do not specify which fiscal element is adjusted when each VAT component changes.10 De Mello (2009) point out other structural factors associated with C-efficiency, such as the efficiency of tax administration and the country's governance indicators.…”