How is Tax Policy Conducted over the Business Cycle?

Carlos A. Vegh, Guillermo Vuletin

NBER Working Paper No. 17753
Issued in January 2012
NBER Program(s):   IFM

It is well known by now that government spending has typically been procyclical in emerging economies but acyclical or countercyclical in industrial countries. Little, if any, is known, however, about the cyclical behavior of tax rates (as opposed to tax revenues, which are endogenous to the business cycle and hence cannot shed light on the cyclicality of tax policy). We build a novel dataset on tax rates for 62 countries for the period 1960-2009 that comprises corporate income, personal income, and value-added tax rates. We find that, by and large, tax policy is acyclical in industrial countries but procyclical in developing countries. We show that the evidence is consistent with a model of optimal fiscal policy under uncertainty.

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Acknowledgments

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