WPS5666 Policy Research Working Paper 5666 Fiscal Policy and Debt Dynamics in Developing Countries Ethan Ilzetzki The World Bank Development Research Group Macroeconomics and Growth Team May 2011 Policy Research Working Paper 5666 Abstract Using a new tax database for 28 countries and a variety added tax rates. The author incorporates debt dynamics of econometric methods, this paper contributes to into a fiscal vector autoregression model for a number of the debate on the effects of fiscal policy on economic developing countries. Existing estimates of the effects of activity in a number of ways. The analysis finds that fiscal policy on growth use linear time-series methods, tax cuts have a stimulative effect on economic growth which may assess the effects of fiscal policy along a debt- in developing countries. Lowering the personal income path that is unsustainable. Incorporating the non-linear tax rate by 1 percentage point, or cutting revenues by relationship between government expenditure, taxes, 1 gross domestic product of gross domestic product and debt alters estimates of the impact of fiscal policy on increases gross domestic product by 0.3–0.4 percent on gross domestic product in several countries. In Brazil, for impact and 0.8 percent in the long run. The author finds example, conventional time-series methods may overstate that cuts in personal income taxes are more effective the effects of fiscal policy on gross domestic product, by in stimulating growth than cuts in corporate or valued ignoring the detrimental effects of debt accumulation. This paper is a product of the Macroeconomics and Growth Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at e.ilzetzki@lse.ac.uk. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 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E96  D 2?5 6J@?5P ! !$ "#% % !#  "#$ %@   & D / d Z W 40% 35% 30% 25% Z Z 20% d d 15% D D 10% 5% 0% / h/d d h 1993 1994 &  D d Z  D d Z D d Z &  D d Z D d Z t Z> & D W / d Z   Z K Z  Z & d Z s d W/d /d s d W/d /d   s d W/d /d s d W/d /d   s d W/d /d s d W/d /d   s d W/d /d s d W/d /d & d Z   s d W/d /d s d W/d /d  Z  Z s d W/d /d s d W/d /d  & s d W/d /d s d W/d /d & d Z ' , s d W/d /d s d W/d /d > > s d W/d /d s d W/d /d D D s d W/d /d s d W/d /d W W s d W/d /d s d W/d /d & d Z ^ ^ s d W/d /d s d W/d /d ^ d s d W/d /d s d W/d /d h< h^ s d W/d /d ^ d W/d /d Figure 5: Fiscal Multipliers in High-Income Countries High Income Countries: G multiplier 2 1.8 1.6 1.4 1.2 Long Run: 1.08 1 Impact: 0.77 0.8 0.6 0.4 0.2 Quarters 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1.2 High Income Countries: Tax multiplier 1 0.8 0.6 0.4 Long Run: 0.28 Impact: 0.1 0.2 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -0.2 -0.4 Quarters -0.6 Figure 6: Fiscal Multipliers in Developing Countries 0.8 Developing Countries: G multiplier 0.6 0.4 0.2 Long Run: 0.15 Impact: 0.17 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -0.2 -0.4 Quarters -0.6 2 Developing Countries: Tax multiplier 1.6 1.2 Long Run: 0.83 0.8 Impact: 0.3 0.4 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Quarters -0.4 Figure 7: Fiscal Multipliers in Open Economies Open Economies: G multiplier 1 0.8 0.6 0.4 Long Run: 0.08 0.2 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.2 -0.4 -0.6 Impact: 0.03 Quarters -0.8 Open Economies: Tax multiplier 0.4 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Long Run: -0.31 -0.4 Impact: 0.08 -0.8 Quarters -1.2 Figure 8: Fiscal Multipliers in Closed Economies Closed Economies: G multiplier 2.8 2.3 1.8 Long Run: 1.4 1.3 0.8 0.3 Impact: 0.39 Quarters -0.2 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Closed Economies: Tax multiplier 2.4 2 1.6 Long Run: 1.28 1.2 0.8 0.4 Impact: 0.05 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -0.4 Quarters -0.8 Figure 9: Fiscal Multipliers under Fixed Exchange Rates Fixed Exchange Rates: G multiplier 2.3 1.8 Long Run: 1.2 1.3 0.8 0.3 Impact: 0.02 Quarters 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.2 Fixed Exchange Rates: Tax multiplier 0.8 0.4 Long Run: 0.03 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Impact: 0.1 -0.4 Quarters -0.8 Figure 10: Fiscal Multipliers under Flexible Exchange Rates Flexible Exchange Rates: G multiplier 1 0.5 0 Long Run: 0.55 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -0.5 Impact: 0.32 -1 Quarters -1.5 0.8 Flexible Exchange Rates: Tax multiplier 0.4 Long Run: -0.15 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -0.4 Impact: 0.16 -0.8 Quarters -1.2 Figure 11: Impulse Responses in Developing Countries Response of G to a shock to G .05 .04 .03 .02 .01 .00 -.01 5 10 15 20 25 30 Response of Tax Revenues to a shock to G .015 .010 .005 .000 -.005 -.010 5 10 15 20 25 30 Response of GDP to a shock to G .006 .004 .002 .000 -.002 -.004 5 10 15 20 25 30 Figure 12: Impulse Responses in Closed Economies Response of G to a shock to taxes .004 .002 .000 -.002 -.004 -.006 -.008 5 10 15 20 25 30 Response of Tax Revenues to a shock to taxes .04 .03 .02 .01 .00 -.01 5 10 15 20 25 30 Response of GDP to a shock to taxes .004 .002 .000 -.002 -.004 5 10 15 20 25 30 )LJXUH  $FWXDO DQG 6\QWKHWLF 'HEW 6HULHV Brazil chile .40 .40 .36 .35 .30 .32 .25 .28 .20 .24 .15 .20 .10 98 99 00 01 02 03 04 05 06 96 97 98 99 00 01 02 03 04 05 06 ACTUAL ESTIMATED ACTUAL ESTIMATED Estonia (Net Debt) .06 Malaysia .46 .04 .44 .02 .42 .00 .40 -.02 .38 -.04 .36 -.06 .34 2000 2001 2002 2003 2004 2005 2006 1999 2000 2001 2002 2003 2004 2005 ACTUAL ESTIMATED ACTUAL ESTIMATED South Africa .7 .6 .5 .4 .3 .2 .1 1999 2000 2001 2002 2003 2004 2005 2006 ACTUAL ESTIMATED 0.03 Figure 14a: Responses to a shock to government expenditure, Brazil 0.002 Inflation 0.025 Government Expenditure 0.001 0.02 0.015 0 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.01 0.005 -0.002 0 -0.003 -0.005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.004 -0.01 -0.005 0.01 0.02 Interest Rate Tax Revenues -0.006 0.015 0.005 0.01 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.005 Series1 -0.005 0 Series2 -0.01 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.005 Series3 -0.015 -0.01 Series4 -0.02 -0.015 0.01 0.08 Exchange Rate GDP 0.06 0.008 0.04 0.006 0.02 0.004 0 0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.02 0 -0.04 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.06 -0.004 -0.08 -0.006 -0.1 0.006 Figure 14b: Responses to a shock to tax revenues, Brazil 0.004 0.008 Inflation 0.002 0 0.006 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.004 0.004 -0.006 -0.008 0.002 Government Expenditure -0.01 -0.012 0 -0.014 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.016 -0.002 0.015 Interest Rate 0.04 Tax Revenues -0.004 0.01 0.03 0.005 0.02 0 0.01 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.005 0 -0.01 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.01 -0.015 -0.02 -0.02 0.004 0.08 GDP Exchange Rate 0.002 0.06 0 0.04 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.002 0.02 -0.004 0 -0.006 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.02 -0.008 -0.04 -0.01 -0.06 Figure 14c: Implied Changes in Debt-to-GDP ratio in BP (dotted) and FG (solid) VARs, Brazil 2.0% G increase 0.2% Tax increase 0.0% 1.5% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.2% 1.0% -0.4% -0.6% 0.5% -0.8% -1.0% 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -1.2% -0.5% -1.4% 0.016 Figure 15a: Responses to a shock to government expenditure, Chile 0.014 0.0015 Inflation 0.012 Government Expenditure 0.001 0.01 0.008 0.0005 0.006 0 0.004 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.002 -0.0005 0 -0.001 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.004 -0.0015 0.015 0.0004 Interest Rate Tax Revenues -0.002 0.0003 0.01 0.0002 0.005 0.0001 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.005 -0.0001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.01 -0.0002 -0.015 -0.0003 -0.02 -0.0004 0.004 0.03 Exchange Rate GDP 0.003 0.02 0.002 0.001 0.01 0 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.01 -0.003 -0.004 -0.02 -0.005 -0.006 -0.03 0.005 Figure 15b: Responses to a shock to tax revenues, Chile 0.004 0.004 Inflation 0.003 0.002 0.003 0.001 0 0.002 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.002 0.001 Government Expenditure -0.003 -0.004 0 -0.005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.006 -0.001 0.0004 Interest Rate 0.08 Tax Revenues -0.002 0.0002 0.06 0 0.04 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.0002 0.02 -0.0004 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.0006 -0.02 -0.0008 -0.04 0.005 0.05 GDP Exchange Rate 0.004 0.003 0.04 0.002 0.001 0.03 0 0.02 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.002 0.01 -0.003 -0.004 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.005 -0.01 Figure 15c: Implied Changes in Debt-to-GDP ratio in BP (dotted) and FG (solid) VARs, Chile 0.9% G increase Tax increase 0.0% 0.8% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.7% -0.1% 0.6% 0.5% -0.1% 0.4% -0.2% 0.3% 0.2% -0.2% 0.1% 0.0% -0.3% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.03 Figure 16a: Responses to a shock to government expenditure, Estonia 0.002 Inflation 0.025 Government Expenditure 0.001 0.02 0 0.015 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.01 -0.002 0.005 -0.003 0 -0.005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.004 -0.005 -0.01 -0.006 0.008 0.02 Tax Revenues Interest Rate -0.007 0.015 0.006 0.01 0.004 0.005 0 0.002 -0.005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0 -0.01 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.002 -0.015 -0.02 -0.004 0.003 0.06 Exchange Rate GDP 0.002 0.04 0.001 0 0.02 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.003 -0.02 -0.004 -0.04 -0.005 -0.006 -0.06 0.025 Figure 16b: Responses to a shock to tax revenues,Estonia 0.004 Inflation 0.02 0.003 0.015 0.002 0.01 0.001 0.005 Government Expenditure 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.005 -0.002 0.008 Interest Rate 0.025 Tax Revenues -0.003 0.006 0.02 0.004 0.015 0.002 0.01 0 0.005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.002 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.004 -0.005 -0.006 -0.01 0.004 0.08 GDP Exchange Rate 0.003 0.06 0.002 0.001 0.04 0 0.02 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.003 -0.02 -0.004 -0.04 Figure 16c: Implied Changes in Debt-to-GDP ratio in BP (dotted) and FG (solid) VARs, Estonia 0.7% G increase Tax increase 0.3% 0.6% 0.2% 0.5% 0.2% 0.1% 0.4% 0.1% 0.3% 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.2% -0.1% -0.1% 0.1% -0.2% 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.2% 0.06 Figure 17a: Responses to a shock to government expenditure, Malaysia 0.0015 Inflation 0.05 Government Expenditure 0.04 0.001 0.03 0.0005 0.02 0.01 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.0005 -0.01 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.02 -0.001 0.05 0.004 Interest Rate Tax Revenues -0.0015 0.003 0.04 0.002 0.03 0.001 0.02 0 0.01 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.003 -0.01 -0.02 -0.004 0.004 0.02 Exchange Rate GDP 0.002 0.015 0 0.01 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.002 0.005 -0.004 0 -0.006 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.005 -0.008 -0.01 -0.01 0.015 Figure 17b: Responses to a shock to tax revenues, Malaysia 0.01 0.002 Inflation 0.005 0 0.0015 -0.005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.01 0.001 -0.015 -0.02 Government Expenditure 0.0005 -0.025 -0.03 0 -0.035 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.005 Interest Rate 0.08 Tax Revenues -0.0005 0.004 0.06 0.003 0.002 0.04 0.001 0 0.02 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.003 -0.02 -0.004 -0.005 -0.04 0.006 0.02 GDP Exchange Rate 0.004 0.015 0.002 0.01 0 -0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.005 -0.004 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.006 -0.005 -0.008 -0.01 -0.01 -0.015 Figure 17c: Implied Changes in Debt-to-GDP ratio in BP (dotted) and FG (solid) VARs, Malaysia 1.0% G increase Tax increase 0.0% 0.9% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.1% 0.8% 0.7% -0.2% 0.6% -0.3% 0.5% -0.4% 0.4% -0.5% 0.3% -0.6% 0.2% -0.7% 0.1% -0.8% 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.9% 0.06 Figure 18a: Responses to a shock to government expenditure, South Africa 0.003 Inflation 0.05 Government Expenditure 0.04 0.001 0.03 0.02 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.01 0 -0.003 -0.01 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.02 -0.005 0.01 0.0008 Interest Rate Tax Revenues -0.007 0.0006 0.005 0.0004 0 0.0002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0 -0.005 -0.0002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.01 -0.0004 -0.0006 -0.015 -0.0008 -0.02 -0.001 0.004 0.04 Exchange Rate GDP 0.02 0.003 0 0.002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.02 -0.04 0.001 -0.06 0 -0.08 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.001 -0.1 0.025 Figure 18b: Responses to a shock to tax revenues, South Africa 0.02 0.004 Inflation 0.015 0.003 Government Expenditure 0.01 0.002 0.005 0.001 0 0 -0.005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.001 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.01 -0.015 -0.002 -0.02 -0.003 0.002 Interest Rate 0.025 Tax Revenues -0.004 0.02 0.0015 0.015 0.001 0.01 0.0005 0.005 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.0005 -0.005 -0.001 -0.01 0.002 0.12 GDP Exchange Rate 0.001 0.1 0.08 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 0.06 -0.001 0.04 -0.002 0.02 0 -0.003 -0.02 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.004 -0.04 Figure 18c: Implied Changes in Debt-to-GDP ratio in BP (dotted) and FG (solid) VARs, South Africa G increase Tax increase 0.2% 0.3% 0.1% 0.2% 0.1% 0.1% 0.0% 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -0.1% -0.1% -0.2% -0.1% -0.3% -0.2% -0.4% Table 1: Tax Revenue Elasticities: Quarterly Estimates  K t W   K d Z K  W/d ^^ 'W t  W/d ^^ /d W/d ^^ /d ^ d Z     : < > D &: '< ,> /D          Z  & ' , > > D W W ^ ^ ^ h< h^  K K K  Table 2: Tax Revenue Elasticities: Annual Estimates Profi t Output Output Avera ge Wa ge el a s ti ci ty of El a s ti ci ty El a s ti ci ty of El a s ti ci ty of Output el a s ti ci ty of Ta x Revenue s ha re of Output El a s ti ci ty PIT SS of CIT Wa ges Profi ts PIT SS CIT VAT PIT SS CIT VAT of Ta x Revenue A B C D E F=AD G=BD H=FC I J K L M FJ + GK + HL + IM Argentina 1.82 0.95 1.00 1.325 0.578 2.41 1.26 0.58 1.206 7.5% 23.6% 14.8% 54.1% 1.22 (0.26) (0.18) (0.12) 5.2% 16.6% 10.4% 37.9% Australia 1.58 - 1.00 0.905 1.263 1.43 - 1.26 0.835 61.9% - 18.5% 5.5% 1.48 (0.12) (0.18) (0.07) 43.4% 0.0% 13.0% 3.9% Brazil 1.95 0.92 1.15 1.238 1.274 2.42 1.14 1.46 1.001 13.9% 39.5% 20.5% - 1.33 (0.19) (0.17) (0.14) 9.7% 27.7% 14.4% 0.0% Belgium 1.49 1.00 1.00 0.782 1.163 1.17 0.78 1.16 0.787 46.2% 45.6% 8.5% 22.9% 0.95 (0.12) (0.30) (0.08) 32.3% 31.9% 5.9% 16.0% Bulgaria 1.64 0.98 1.02 0.960 0.571 1.57 0.94 0.58 0.993 15.3% 42.9% 12.7% 45.4% 0.80 (0.24) (0.15) (0.27) 10.7% 30.0% 8.9% 31.8% Canada 1.28 0.75 1.00 0.817 1.167 1.02 0.58 1.16 0.810 50.0% 19.0% 12.0% 19.0% 0.92 (0.68) (0.62) (0.07) Chile 2.25 0.77 1.00 0.996 1.692 2.24 0.77 1.69 1.038 9.1% 10.3% 27.8% 60.3% 1.28 (0.12) (0.66) (0.09) 6.4% 7.2% 19.4% 42.2% Colombia 2.23 1.01 0.95 0.868 1.623 1.93 0.88 1.54 0.992 46.8% 28.3% 9.7% 46.8% 1.34 (0.10) (0.31) (0.10) 32.7% 19.8% 6.8% 32.8% Croatia 1.62 1.00 1.00 1.104 1.623 1.79 1.10 1.62 0.873 12.8% 48.2% 9.2% 49.3% 1.12 (0.40) (0.51) (0.33) 8.9% 33.8% 6.5% 34.6% Cyprus 1.96 1.00 1.07 0.931 1.481 1.82 0.93 1.58 1.229 15.1% 45.3% 20.4% 28.1% 1.25 (0.07) (0.22) (0.15) 10.6% 31.7% 14.3% 19.6% Czech Rep 1.47 1.00 1.00 0.950 1.132 1.39 0.95 1.13 0.843 17.5% 61.2% 17.1% 25.6% 1.02 (0.15) (0.18) (0.16) 12.2% 42.9% 11.9% 17.9% Dominican Rep. 2.40 0.00 1.00 1.062 1.324 2.55 - 1.32 0.993 18.8% 0.0% 39.1% 15.1% 1.57 (0.00) (0.00) (0.15) 13.2% 0.0% 27.4% 10.6% Estonia 1.20 1.00 1.00 0.993 1.223 1.19 0.99 1.22 1.105 30.1% 49.1% 7.0% 37.9% 1.09 (0.14) (0.22) (0.10) 21.1% 34.4% 4.9% 26.6% France 1.72 0.92 1.00 0.678 1.487 1.17 0.62 1.49 0.918 19.8% 58.0% 7.9% 25.4% 0.85 (0.10) (0.26) (0.07) 13.9% 40.6% 5.6% 17.8% Germany 1.43 0.83 1.00 0.515 1.267 0.74 0.43 1.27 0.602 38.1% 54.6% 6.5% 24.7% 0.60 (0.15) (0.29) (0.12) 26.6% 38.2% 4.6% 17.3% Hungary 1.39 0.98 1.00 0.768 1.153 1.06 0.75 1.15 0.985 20.6% 51.3% 9.0% 32.2% 0.91 (0.27) (0.00) (0.25) 14.5% 35.9% 6.3% 22.6% Latvia 1.18 1.00 1.00 1.421 1.176 1.67 1.41 1.18 1.233 27.1% 45.5% 9.8% 35.8% 1.40 (0.25) (0.17) (0.16) 19.0% 31.9% 6.9% 25.1% Lithuania 1.29 1.00 1.10 1.287 1.310 1.66 1.29 1.44 1.020 33.9% 41.6% 8.0% 36.3% 1.32 (0.16) (0.27) (0.11) 23.8% 29.1% 5.6% 25.4% Malaysia 3.58 1.00 1.10 0.971 1.288 3.48 0.97 1.42 1.131 18.9% 0.0% 47.8% 14.6% 1.84 (0.00) (0.00) (0.12) 13.2% 0.0% 33.5% 10.2% Mexico 1.55 0.97 1.00 1.151 1.401 1.79 1.11 1.40 1.379 22.4% 17.9% 28.7% 40.0% 1.47 (0.13) (0.26) (0.16) 15.7% 12.6% 20.1% 28.0% Peru 2.96 1.00 1.00 0.796 1.376 2.35 0.80 1.38 0.797 9.1% 14.1% 18.7% 58.8% 0.82 (0.10) (0.12) (0.05) 6.3% 9.8% 13.1% 41.2% Poland 1.29 0.95 1.00 1.001 1.106 1.29 0.95 1.11 0.871 22.9% 49.9% 10.8% 28.5% 1.01 (0.18) (0.20) (0.09) 16.0% 35.0% 7.5% 19.9% Slovakia 1.64 0.97 1.00 0.796 1.153 1.30 0.77 1.15 0.763 13.9% 58.7% 12.5% 32.1% 0.87 (0.18) (0.00) (0.09) 9.8% 41.1% 8.8% 22.5% Slovenia 1.54 1.00 1.00 1.298 1.153 2.00 1.30 1.15 0.772 22.1% 53.9% 6.2% 36.8% 1.26 (0.11) (0.00) (0.12) 15.5% 37.7% 4.3% 25.8% South Africa 1.26 - 1.00 1.104 1.874 1.39 - 1.87 1.267 51.7% - 36.4% 23.0% 1.52 (0.10) (0.28) (0.15) 36.2% 0.0% 25.5% 16.1% Thailand 2.46 0.72 1.05 0.773 1.068 1.90 0.55 1.12 0.883 19.5% - 30.5% 37.2% 1.07 (0.08) (0.32) (0.04) 13.6% 0.0% 21.4% 26.1% UK 1.53 1.02 1.00 0.831 1.391 1.28 0.85 1.39 1.056 39.6% 25.5% 13.0% 25.2% 1.13 (0.09) (0.32) (0.09) 27.8% 17.8% 9.1% 17.6% USA 1.35 0.85 1.00 0.809 1.638 1.09 0.69 1.64 0.930 52.9% 36.6% 13.1% 16.6% 1.00 (0.05) (0.52) (0.06) 37.1% 25.7% 9.2% 11.6% Table 3: Output Elasticities: Comparison with OECD estimates W/  W/  K  K K  &  / K W/d ^^ /d W/d ^^ /d / K   & ' h< h^ Table 4: Tax Changes and GDP Dependent Variable: Change in GDP Full Sample Developing countries OLS Arellano-Bond OLS Arellano-Bond -0.14 -0.16 -0.20 -0.37 PIT (.055) (.081) (.080) (.091) 0.043 -0.084 0.018 0.034 CIT (.028) (.063) (.060) (.061) 0.38 0.51 0.44 0.55 VAT (.129) (.55) (.24) (.33) Lagged 0.35 0.37 GDP (.043) (.10) -00079 0.0035 -0.015 UR 0.003 (.0017) (.00036) (0.0011) (.0012) Trading 1.62 2.77 Partners' 1.52 (.31) 2.95 (.23) (.34) (.44) Growth n 335 308 188 166 Significant at 1% Significant at 5% Significant at 10% Table 5: Shares of Debt Denominated in Foreign Currency Selected years Country Year Share 2001 40% Brazil 2008 23% 2002 93% Chile 2009 37% Estonia 2004 100% Malaysia 2003 20% 1994 20% South Africa 2008 42% Data Appendix 1. Quarterly Public Finance Database: This dataset includes quarterly time series for total government revenue, tax revenue, revenues from social security, total expenditures (current and capital), interest payments and transfers. The data refer to the consolidated general government or the consolidated central government (including social security), depending on the existence of quarterly accounts for the general government in each country. Data are from national sources, with the exception of the UK and Canada from the OECD Economic Outlook and Belgium, Bulgaria, Czech Republic, Cyprus, France, Germany, Hungary, Poland, Slovakia and Slovenia from Eurostat. Links to these sources are provided below. For the Latin American and Asian countries in the sample the data correspond to central government accounts. For the remaining countries the data refers to the Consolidated General Government. 2. Annual Tax Revenue Breakdown: This dataset contains the breakdown of tax revenues by their components: Personal Income Tax Revenue, Corporate Income Tax Revenue, Value Added Tax Revenues (or Sales Tax Revenues, for countries with no VAT) and Social Security Contribution Revenues. This database was constructed separately from the Quarterly Public Finance Dataset since these series are not always reported together and, many times, the tax revenue breakdown is in annual frequency. For Latin American and Asian countries, where Central Government is being considered, only federal tax revenues are included. Data was taken from national sources, with the exception of Argentina, Chile, Colombia and Mexico from ECLAC; Canada, UK, France, Germany, Belgium, Czech Republic, Poland, Slovakia and Hungary from OECDstats and Cyprus from the IMF’s IFS. 3. Statutory Tax Rates: The data related to the statutory tax rates, comprised by tax brackets and rates of Personal Income Tax, Corporate Income Tax, Social Security and VAT, comes from the OECD Tax Database for OECD countries (www.oecd.org/tax); from the annually tax books “Individual Taxes: Worldwide Summaries” and “Corporate Taxes: Worldwide Summaries”, published by PriceWaterhouseCoopers until 2005; from the PWC tax webpage which has the latest statutory tax information (www.pwc.com/gx/en/worldwide-tax-summaries); and also from the KPMG Individual and Corporate Tax Rate Survey from 2006-2009. a. Personal Income Tax is generally progressive and composed by several brackets, but there are a few exceptions of countries and years in which a flat rate applies (Bulgaria and Czech Republic after 2008). b. Corporate Income Tax is usually given by a flat rate on profits, although there are also a few exceptions. Brazil has a progressive tax schedule with two brackets and Bulgaria had a progressive tax schedule in the years 1999- 2001. For Lithuania (after 2003), Cyprus (1995-2004), Malaysia and Thailand have different tax rates according to the firm size. In Argentina and Colombia, if the resulting chargeable corporate tax is small enough, there is a complementary tax on assets. According to the perceived regressiveness/progressiveness of the tax schedule the imputed profit elasticities in those cases vary from 1.0 to 1.1. c. VAT (or Sales Tax) although there are many deductions according to the nature of each product, we consider the standard flat rate. In the USA, where there are State, County and Municipal sales taxes, we consider the national average sales-tax rate. d. Social Security usually has regressive tax rates with several brackets. UK is the only exception, since a high tax credit offsets the effect of regressiveness from the tax brackets. The income elasticities of social security tax revenues, computed in a similar way to the personal income tax elasticities, range from 0.75-1.10. 4. Gini Coefficients: The Gini Coefficients were used to log-normalize of the labor earnings distribution for the computation of personal income tax and social security elasticities. Series on Gini coefficients were taken from the World Bank’s Povcal Net database for developing countries and national sources for high-income countries with the exception of France, Germany and Belgium, taken from Eurostat. Complementary data from the World Bank’s World Development Indicators were also been used to fill in missing observations and check for consistency. We interpolated remaining missing observations by a regression of the Gini coefficient on GDP for existing years. This allows for predictable shifts in the income distribution due to cyclical conditions to further inform the output elasticity of tax revenues. 5. Average labor earnings: Data is taken from national household income surveys with the exception of Croatia and the UK from the Eurostat and the ILO; Malaysia from the Povcal Net database; and Hungary, Poland, Slovenia and South Africa from the ILO. 6. Complementary Data for the Panel Analysis a. Trade Shock: The trade shock series are based on data from the IMF’s Direction of Trade database. b. Unemployment Rate: The Unemployment rate data have been collected in the IMF’s World Economic Outlook database. Useful Links for Data Sources Argentina www.mecon.gov.ar/hacienda Mexico www.apartados.hacienda.gob.mx www.indec.gov.ar www.inegi.org.mx Australia www.abs.gov.au Peru www.bcrp.gob.pe Belgium statbel.fgov.be/en www.mef.gob.pe Brazil www.tesouro.fazenda.gov.br www.inei.gob.pe www.receita.fazenda.gov.br Slovakia www.statistics.sk www.ipeadata.gov.br Slovenia www.stat.si Bulgaria www.nsi.bg www.mf.gov.si Canada www.statcan.gc.ca South Africa www.reservebank.co.za Chile www.dipres.cl Thailand nso.go.th/en www.bcentral.cl UK www.ifs.org.uk Colombia www.banrep.gov.co USA www.bea.gov www.dane.gov.co www.dol.gov Croatia www.mfin.hr/en World Economic Outlook www.imf.org/weo Cyprus www.mof.gov.cy Direction of Trade www.imfstatistics.org/DOT Czech Rep www.czso.cz Povcal Net www.worldbank.org/poverty Dominican R. www.hacienda.gov.do World Development Indicators data.worldbank.org www.one.gob.do Eurostat epp.eurostat.ec.europa.eu Estonia www.stat.ee/en International Finance Statistics www.imfstatistics.org France www.insee.fr/en OECDstats stats.oecd.org Latvia www.csb.gov.lv CEPALstats websie.eclac.cl/sisgen Lithuania www.stat.gov.lt/en LABORsta laborsta.ilo.org Malaysia www.statistics.gov.my OECD Economic Outlook www.sourceoecd.org www.anm.gov.my Time Series Coverage for the SVAR Argentina 1993Q1 - 2009Q3 Germany 1999Q1 - 2009Q1 Australia 1959Q3 - 2009Q3 Hungary 1999Q1 - 2009Q3 Belgium 1991Q1 - 2009Q3 Latvia 1999Q1 - 2009Q3 Brazil 1997Q1 - 2009Q3 Lithuania 1999Q1 - 2009Q3 Bulgaria 1999Q1 - 2009Q3 Malaysia 1999Q1 - 2009Q3 Canada 1970Q1 - 2009Q3 Mexico 1993Q1 - 2009Q3 Chile 1989Q1 - 2009Q3 Peru 1993Q1 - 2009Q3 Colombia 1995Q1 - 2009Q3 Poland 1993Q1 - 2009Q3 Croatia 2004Q3 - 2009Q3 Slovakia 1993Q1 - 2009Q3 Cyprus 1995Q1 - 2009Q3 Slovenia 1993Q1 - 2009Q3 Czech Rep 1999Q1 - 2009Q3 South Africa 1990Q1 - 2009Q3 Dominican Rep 2002Q1 - 2009Q3 Thailand 1993Q4 - 2009Q3 Estonia 1999Q1 - 2009Q3 United Kingdom 1970Q1 - 2009Q3 France 1991Q1 - 2009Q1 United States 1947Q1 - 2009Q3