Policy Implications of Non-linear Effects of Tax Changes on Output
An earlier paper titled "Non-linear effects of tax changes on output: The role of the initial level of taxation," estimated tax multipliers using (i) a novel dataset on value-added taxes for 51 countries (21 industrial and 30 developing)...
| Main Authors: | , , , |
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| Language: | English |
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World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/158141548698817351/Policy-Implications-of-Non-linear-Effects-of-Tax-Changes-on-Output http://hdl.handle.net/10986/31188 |
| Summary: | An earlier paper titled "Non-linear
effects of tax changes on output: The role of the initial
level of taxation," estimated tax multipliers using (i)
a novel dataset on value-added taxes for 51 countries (21
industrial and 30 developing) for the period 1970-2014, and
(ii) the so-called narrative approach developed by Romer and
Romer (2010) to properly identify exogenous tax changes. The
main finding is that, in line with existing theoretical
distortionary and disincentive-based arguments, the effect
of tax changes on output is highly non-linear. The tax
multiplier is essentially zero under relatively low/moderate
initial tax rate levels and more negative as the initial tax
rate and the size of the change in the tax rate increase.
This companion paper first shows that these findings have
important policy implications, given that the initial level
of taxes varies greatly across countries and thus so will
the potential output effect of changing tax rates. The paper
then turns to some specific policy applications. It focuses
on the relevance of the arguments for revenue mobilization
in countries with low levels of provision of public goods
and social and infrastructure gaps, as well as in
commodity-dependent countries. The paper then considers some
practical implications for the standard debt sustainability
analysis. Lastly, it evaluates the implications of the
findings for the Laffer curve. |
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