## Tax Reforms and Fiscal Shock Smoothing

_IMF Working Papers, May 23, 2019_

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**Canonical URL:** [Tax Reforms and Fiscal Shock Smoothing](https://www.imf.org/en/publications/wp/issues/2019/05/23/tax-reforms-and-fiscal-shock-smoothing-46903)

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## Bibliographic details
- Authors: Laura Jaramillo, Pooja Karnane, Aleksandra Zdzienicka
- Published: May 23, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498315623.001

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### Summary findings
- Scope: panel of 13 OECD economies during the period 1980-2017.
- Main result: tax reforms, in particular those that broaden the tax base, significantly enhance the ability of fiscal policy to mitigate the impact of growth shocks on disposable income.
- Quantitative effect: the magnitude of shock smoothing increases from an average of 2 percent to 3-3½ percent following the reform.
- Comparative effects:
  - Effects are considerably higher for tax base changes than for tax rate changes.
  - Effects are higher for indirect tax changes than for direct tax changes.
- Symmetry: the effects are symmetric—that is, the increase in shock smoothing following a reform expanding the tax base (rate) is similar to the decline in shock smoothing after a reform narrowing the tax base (rate).

### Channels and key mechanisms
- Tax elasticity is an important channel through which tax reforms affect fiscal stabilization.
- Collection efficiency is an important channel through which tax reforms affect fiscal stabilization.
- The progressivity of the tax system is an important channel through which tax reforms affect fiscal stabilization.

### Policy implications
- Reforms that broaden the tax base can materially strengthen fiscal shock-smoothing capacity.
- Emphasize measures that improve tax elasticity and collection efficiency to amplify stabilization benefits.
- Consider the distributional implications tied to the progressivity of the tax system when designing tax reforms aimed at shock smoothing.

*Tax Reforms and Fiscal Shock Smoothing, IMF Working Papers 2019, 113 (May 23, 2019).*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/23/tax-reforms-and-fiscal-shock-smoothing-46903_