Asymmetric behaviour of corporate tax revenues in the business cycle

This paper estimates the response of corporate tax revenues to the business cycle, the so called ‘cyclicality of corporate tax revenues’. It distinguishes between the impact of the business cycle in recessions and booms and calculates the asymmetry in tax revenues response. It also explains the heterogeneous nature of the asymmetries using a new index of loss offset generosity provisions. We find that the short run contemporaneous impact of business cycle on corporate tax revenues is quite strong in normal times, but much lower in booms. The asymmetry of cyclicality between booms and recessions is persistent and points to larger responses in recessions. We also show how sensitive tax revenue responses are to different recession and boom thresholds. Importantly, we find that loss offset generosity provisions enhance this asymmetry in the cyclicality of corporate tax revenues. Countries that are more generous in terms of loss offset provisions experience much more volatile response of corporate tax revenues to business cycle during recessions, magnifying the asymmetry of cyclicality. As a result the automatic stabilizer impact of corporation tax will differ between booms and recessions, being stronger and more effective in the latter, especially in countries that offer more generous loss-offset provisions