Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations
IMF Working Papers, September 28, 2018
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- Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations
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Bibliographic details
- Authors: Era Dabla-Norris, Frederico Lima
- Published: September 28, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484377451.001
Summary
- Authors: Era Dabla-Norris, Frederico Lima
- Date: September 28, 2018
- Core question: How do tax changes (rate hikes vs. base broadening) implemented during fiscal consolidations affect macroeconomic outcomes?
- Dataset: 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.
- Tax dimensions analyzed: Distinguishes between tax rate and tax base changes; further separates personal income, corporate income, and value added tax (VAT) changes.
- Principal conclusion: Base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.
Methodology and Data
- Constructed a narrative dataset of tax measures for fiscal consolidation years.
- Recorded attributes: expected revenue impact, motivation, announcement date, implementation date for each tax measure.
- Coverage: nearly 2,500 tax measures across 10 OECD countries.
- Tax categories explicitly analyzed: personal income tax, corporate income tax, value added tax.
Key Findings
- Base broadening vs. rate hikes:
- Base broadening is associated with smaller declines in output.
- Base broadening is associated with smaller declines in employment.
- Findings hold when disaggregating by tax type (personal income, corporate income, VAT).
- Implicit finding: tax design (rate vs. base) matters for macroeconomic effects during consolidations.
Policy Implications / Recommendations
- When designing fiscal consolidations, policymakers should consider favoring base broadening measures over tax rate increases to mitigate adverse macroeconomic and labor-market effects.
- Careful attention to the composition of tax changes across personal income, corporate income, and VAT can influence the macroeconomic cost of consolidation.
Subjects and Keywords
- Subjects: Corporate income tax, Economic sectors, Expenditure, Financial crises, Personal income tax, Revenue administration, Taxes, Value-added tax
- Keywords: Corporate income tax, debt ratio, estimated tax, Global, narrative dataset, Personal income tax, Southern Europe, tax base, tax measure, tax multiplier, tax multipliers, tax rate, tax shock, Value-added tax
Source: IMF Working Paper "Macroeconomic Effects of Tax Rate and Base Changes: Evidence from Fiscal Consolidations" by Era Dabla-Norris and Frederico Lima, September 28, 2018.