This paper examines the role of tax policy reforms in enhancing fiscal shock smoothing in a panel of 13 OECD economies during the period 1980-2017. The results suggest that tax reforms, in particular those that broaden the tax base, significantly enhance the ability of fiscal policy to mitigate the impact of growth shocks on disposable income. We find that the magnitude of shock smoothing increases from an average of 2 percent to 3-3½ percent following the reform. The effects are considerably higher for tax base than tax rate changes, and also higher for indirect tax than direct tax changes. The effects are symmetric—that is, the increase in shock smoothing following a reform expanding the tax base (rate) is similar to the decline in shock smoothing after a reform narrowing the tax base (rate). Tax elasticity, collection efficiency, and the progressivity of the tax system are important channels through which tax reforms affect fiscal stabilization.

• Cover
• TABLE OF CONTENTS
• ABSTRACT
• I. INTRODUCTION
• II. DATA AND EMPIRICAL METHODOLOGY
  • A. Data
  • B. Empirical Framework
• III. EMPIRICAL RESULTS
  • A. Baseline
  • B. Robustness Checks
• IV. CONCLUSIONS AND POLICY IMPLICATIONS
• REFERENCES
• TABLES
  • Table 1. Example: Identification of Reform Episodes
  • Table 2: Effect of Tax Reforms on Fiscal Shock Smoothing
• FIGURES
  • 1. Direct Tax Reform Indicators Over Time
  • 2. Indirect Tax Reform Indicators Over Time
  • 3. Effect of Direct Tax Reforms on Fiscal Shock Smoothing
  • 4. Effect of PIT Reforms on Fiscal Shock Smoothing
  • 5. Effect of CIT Reforms on Fiscal Shock Smoothing
  • 6. Effect of Indirect Tax Reforms on Fiscal Shock Smoothing
  • 7. Effect of Direct Tax Reforms on Fiscal Shock Smoothing Depending on the Direction of the Reform
  • 8. Effect of Indirect Tax Rate Reforms on Fiscal Shock Smoothing Depending on the Direction of the Reform
  • 9. Effect of Direct Tax Reforms on Tax Elasticity with Respect to Output
  • 10. Effect of Indirect Tax Reforms on Tax Elasticity with Respect to Output
  • 11. Effect of PIT Reforms on Tax Progressivity
  • 12. Effect of VAT Reforms on C-Efficiency
  • 13. Effect of Direct Tax Reforms on Fiscal Shock Smoothing Controlling for the Initial Level of Public Debt
  • 14. IV Estimator: Effect of PIT Reforms on Tax Progressivity
  • 15. GMM Estimator: Effect of Direct Tax Reforms on Fiscal Shock Smoothing
  • 16. Alternative Reform Threshold: Effect of Tax Reforms on Fiscal Shock Smoothing
  • 17. Alternative Reform Codification: Effect of Tax Reforms on Fiscal Shock Smoothing
  • 18. Alternative Database: Effect of Tax Reforms on Fiscal Shock Smoothing
• APPENDICES
  • Table A1. OECD: Distribution of Tax Policy Changes in the TPRD Database
  • Table A2. 13 OECD Countries: Summary Statistics – Exogenous Database
  • Figure A1. OECD: Average Top Central Rates
  • Figure A2. OECD: Average Tax Revenue