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Measuring the effect of tax changes on economic activity in Peru

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  • Lahura, Erick

    (Banco Central de Reserva del Perú
    Pontificia Universidad Católica del Perú (PUCP))

  • Castillo, Giovana

    (SUNAT
    Pontificia Universidad Católica del Perú (PUCP))

Abstract

This paper quantifies the effect of tax changes on economic activity in Peru. Following the seminal work by Romer and Romer (2010), we use narrative records related to legislated tax changes that took place during the last 25 years in order to identify exogenous tax changes. The results show that tax increases (cuts) have a negative (positive) effect on real GDP: on impact, the elasticity of real GDP with respect to tax revenue (as a percentage of nominal GDP) is approximately -0.11, whereas the maximum elasticity is -0.22 after six quarters. After a tax increase (cut) of 1 percent of nominal GDP, tax revenue (as a percentage of nominal GDP) decreases (increases) by 0.28 percentage points on impact and reaches a maximum negative (positive) effect of 0.49 percentage points after 7 quarters. Thus, while a tax cut may have a positive effect on economic activity, the resulting increase in tax revenue does not compensate the initial tax cut.

Suggested Citation

  • Lahura, Erick & Castillo, Giovana, 2016. "Measuring the effect of tax changes on economic activity in Peru," Working Papers 2016-010, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2016-010
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