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Tax Revenue Response To The Business Cycle

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Executive Summary

This paper examines tax revenue during the business cycle by estimating the relationship between tax revenue efficiency and the output gap. The author finds a positive and significant relationship between these variables; results are consistent for quarterly and annual data, and across advanced and developing economies. The author also finds that a worsening (improvement) in the VAT C-efficiency is driven by shifts in consumption patterns and changes in tax evasion during contractions (expansions). A key implication is that, particularly during major economic booms and downturns, policy makers should look beyond simple, long-run revenue elasticities and incorporate into their analysis the effects of the economic cycle on tax revenue efficiency.

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