A reassessment of discretionary tax policy in the European Union: A cyclically-adjusted approach

Giovanni Carnazza () and Federica Lanterna ()
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Giovanni Carnazza: Università di Roma Tre
Federica Lanterna: University Roma Tre, Department of Economics

No 281, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: An extensive economic literature has investigated the cyclical behaviour of the budget balance in response to the business cycle. However, little is known about the behaviour of one of its two main components, i.e. tax revenue. We shed new light on this issue by focusing on a panel of 27 EU countries for the period 1995-2022. Using a novel empirical strategy to pre-adjust each revenue item for the business cycle, we study the behaviour of personal income tax, corporate income tax, indirect taxes, social security contributions, and non-tax revenues. Considering different econometric techniques, we find a general and stable pro-cyclical behaviour for all tax items in the EU, except for corporate income tax. This behaviour is then analysed with the varyingcoefficient model, assessing the impact of a novel variable combining the stringency of the European fiscal framework and the debt-to-GDP ratio. Generally, this indicator seems to have intensified the procyclical trend of each revenue item.

Keywords: Tax policy; Pro-cyclicality; Tax Revenue; Cyclical adjustment; European Union (search for similar items in EconPapers)
JEL-codes: E32 E62 H20 (search for similar items in EconPapers)
Pages: 38
Date: 2024-03
New Economics Papers: this item is included in nep-eec, nep-eur, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:rtr:wpaper:0281

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