Working Paper: NBER ID: w17753
Authors: Carlos A. Vegh; Guillermo Vuletin
Abstract: It is well known by now that government spending has typically been procyclical in developing economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and hence cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960-2013 that comprises corporate income, personal income, and value-added tax rates. We find that, by and large, tax policy is acyclical in industrial countries but mostly procyclical in developing countries. Further, tax policy in countries with better institutions and/or more integrated with world capital markets tends to be less procyclical/more countercyclical.
Keywords: tax policy; business cycle; developing countries; industrial countries
JEL Codes: E32; E62; H20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax policy is acyclical in industrial countries (H29) | Tax policy is procyclical in developing countries (H29) |
| Better institutional quality (O17) | Less procyclical and more countercyclical tax policies (H29) |
| Procyclical spending policies (E62) | Similar behavior in tax policies (H29) |
| Tax policy changes (H29) | Economic output (E23) |