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

Author

Listed:
  • Giovanni Carnazza

    (Università di Roma Tre)

  • Federica Lanterna

    (University Roma Tre, Department of Economics)

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.

Suggested Citation

  • Giovanni Carnazza & Federica Lanterna, 2024. "A reassessment of discretionary tax policy in the European Union: A cyclically-adjusted approach," Departmental Working Papers of Economics - University 'Roma Tre' 0281, Department of Economics - University Roma Tre.
    • Handle: RePEc:rtr:wpaper:0281
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    More about this item

    Keywords

    Tax policy; Pro-cyclicality; Tax Revenue; Cyclical adjustment; European Union;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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