The Stability of Tax Elasticities over the Business Cycle in European Countries

Abstract

We estimate short- and long-run tax elasticities that capture the relationshipbetween changes in national income and tax revenue. We show that the short-run tax elasticity changes according to the business cycle. We estimate a two-state Markov-switching regression on a novel data set of tax policy reforms in15 European countries from 1980 to 2013, showing that the elasticities duringbooms and recessions are statistically (and often economically) different. Theelasticities of personal income taxes, corporate income taxes, indirect taxes andsocial contributions tend to be larger during recessions. Estimates of long-runelasticities are in line with existing literature.