Tax Revenue Response to the Business Cycle

This paper examines tax revenue during the business cycle by estimating the relationship between tax revenue efficiency and the output gap. We find a positive and significant relationship between these variables; results are consistent for quarterly and annual data, and across advanced and developing economies. We also find that a worsening (improvement) in the VAT C-efficiency is driven by shifts in consumption patterns and changes in tax evasion during contractions (expansions). A key implication is that, particularly during major economic booms and downturns, policy makers should look beyond simple, long-run revenue elasticities and incorporate into their analysis the effects of the economic cycle on tax revenue efficiency.Economic forecasting;Economic models;Tax revenues;Value added tax;vat, tax revenue, tax evasion, tax base, tax burden, tax compliance, databases, tax policy, tax collections, tax rates, fiscal policy, fiscal balances, public finance, fiscal affairs department, tax collection, taxation, cyclical fiscal policy, tax system, tax avoidance, tax administration, structural fiscal, increase in consumption