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45. Tax revenues sensitivity to economic activity (december 2017)

Elasticity of tax revenues with respect to macroeconomic activity is a fundamental piece of information in public finances. However, changing legislative environment effectively conceals the actual response of tax revenues to exogenous stimuli. Therefore in this work we use a novel database of tax revenues at the Ministry of Finance adjusted for the impact of legislative measures and estimate elasticities of individual and total tax revenues. We employ an error-correction approach which allows us to distinguish between immediate and long-term responses of tax revenues to economic activity. We find that the long-term elasticities of health care contributions and value added tax are less than unity while elasticities of labour income tax and corporate income tax exceed unity. The elasticity of social insurance contributions is very close to unity. Covering around 85 per cent of all government tax revenues we find that the elasticity of total tax collection with respect to GDP is below unity. Hence, the tax revenues cannot sustain the pace of growth with potential output in the long-run unless further legislative measures are implemented.

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