A Deep Dive into Tax Buoyancy: Comparing Estimation Techniques in a Large Heterogeneous Panel
IMF Working Papers, March 17, 2023
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- A Deep Dive into Tax Buoyancy: Comparing Estimation Techniques in a Large Heterogeneous Panel
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Bibliographic details
- Authors: Antoine Cornevin, Juan S Corrales, Juan Pablo Angel
- Published: March 17, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400238376.001
Overview and scope
- Authors: Antoine Cornevin, Juan S Corrales, Juan Pablo Angel
- Publication date: March 17, 2023
- Period covered: 1990-2020
- Sample: panel of 185 countries
- Series: Working Paper No. 2023/071, Issue: 071, Volume: 2023, Pages: 72
- DOI: https://doi.org/10.5089/9798400238376.001
- ISBN: 9798400238376
- ISSN: 1018-5941
- Subject classifications: 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
Key findings
- The study provides new empirical evidence on tax buoyancy (tax revenues responsiveness to changes in economic activity) using a large heterogeneous panel for 1990-2020.
- Long-term buoyancy:
- Results broadly confirm the main body of the literature on long-term buoyancy hovering around one.
- Short-term buoyancy:
- Evidence of lower estimates for short-term buoyancy relative to previous literature.
- Implication: limited automatic stabilization power of taxes in the short run.
- Robustness and controls:
- In addition to changes in tax rates, the authors introduce novel control variables for tax exemptions and bases to disentangle discretionary from automatic tax revenue changes.
- Marginal changes in results when controlling for policy actions suggest that, on average, the economic cycle does not necessarily influence tax reforms.
Methodological comparison
- The 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.
- Estimators and methodological terms highlighted in the paper include:
- common correlated effect
- DFE estimator
- MG estimator
- approaches addressing cross-sectional dependence
Policy-relevant implications
- Short-term policy design:
- Lower short-term buoyancy estimates imply a reduced automatic stabilization role for tax instruments in economic downturns and recoveries.
- Tax policy assessment:
- Introducing controls for tax exemptions and tax bases helps distinguish discretionary policy actions from cyclical revenue movements, informing better policy diagnostics.
- Fiscal sustainability and reform timing:
- The finding that the economic cycle does not necessarily influence tax reforms on average suggests that policymakers may not systematically time reforms to the cycle; this has implications for designing fiscal rules and reform strategies.
Publication and access notes
- Format: IMF Working Papers
- The paper is positioned as research in progress intended to elicit comments and encourage debate.
IMF Working Paper No. 2023/071 — A Deep Dive into Tax Buoyancy: Comparing Estimation Techniques in a Large Heterogeneous Panel (Antoine Cornevin, Juan S Corrales, Juan Pablo Angel), March 17, 2023.
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