Average tax rate cyclicality in OECD countries: A test of three fiscal policy theories

Davide Furceri and Georgios Karras

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the cyclical properties of the average effective tax rate in 26 OECD countries over 1965-2003 in order to test the validity of three theories of fiscal policy: (i) the standard Keynesian theory which recommends that tax policy should be counter-cyclical, (ii) the Tax Smoothing hypothesis, which implies that changes in GDP should be uncorrelated with tax rates, and (iii) the positive theory of Battaglini and Coate (2008) which predicts that the average tax rate should be negatively correlated with GDP. Our main finding is that the correlations of tax rates with cyclical GDP are generally quite small and statistically indistinguishable from zero. This finding is quite robust and is more consistent with the implications of the Tax Smoothing hypothesis than either the recommendations of the standard Keynesian model or the predictions of Battaglini and Coate’s theory.

Keywords: Fiscal Policy; Tax Rates; Business Cycle (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2010-04-07
New Economics Papers: this item is included in nep-acc, nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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Journal Article: Average Tax Rate Cyclicality in OECD Countries: A Test of Three Fiscal Policy Theories (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:22208

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