The (Subjective) Well-Being Cost of Fiscal Policy Shocks, Working Paper No. 20/5

By Kodjovi M Eklou & Mamour Fall

Do discretionary spending cuts and tax increases hurt social well-being? To answer this question, we combine subjective well-being data covering over half a million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations. We find that fiscal consolidations reduce individual well-being in the short run, especially when they are based on spending cuts. In addition, we show that accompanying monetary and exchange rate policies (disinflation, depreciations and the liberalization of capital flows) mitigate the well-being cost of fiscal consolidations. Finally, we investigate the well-being consequences of the two well-knowns expansionary fiscal consolidations episodes taking place in the 80s (in Denmark and Ireland). We find that even expansionary fiscal consolidations can have well-being costs. Our results may therefore shed some light on why some governments may choose to consolidate through taxes even at the cost of economic growth. Indeed, if spending cuts are to generate a large well-being loss, they can trigger an opposition and protest against a fiscal consolidation plan and hence making it politically costly.


Political Costs of Tax-Based Consolidations, Working Paper No. 19/298

By Chuling Chen, Era Dabla-Norris, Jay Rappaport & Aleksandra Zdzienicka

This paper studies the impact of tax-based consolidations on reelection outcomes. Using a granular database of tax-based consolidations for a panel of 10 OECD countries over the last 40 years, we find that tax reforms are politically costly but some reforms are costlier than others. Measures aimed primarily at reducing existing deficits and debt are costlier than tax consolidation policies for improving long-term growth prospects. Electoral costs are particularly high for broad-based indirect tax and corporate tax reforms. Voters tend to penalize governments less if tax consolidations are announced early in the government’s term or if the government has a strong political mandate. Favorable economic conditions increase public support for tax-based consolidations. Personal income tax reforms are electorally salient if the reforms are frontloaded, announced during recessions, and in less progressive tax systems.


Do Fiscal Rules Cause Fiscal Discipline Over the Electoral Cycle?, Working Paper No. 19/291

By Kodjovi M Eklou & Marcelin Joanis

This paper estimates the causal effect of fiscal rules on political budget cycles in a sample of 67 developing countries over the period 1985–2007. We exploit the geographical pattern in the adoption of fiscal rules to isolate an exogenous source of variation in the adoption of national fiscal rules. Based on a diffusion argument, we use the number of other countries in a given subregion that have fiscal rules in place to predict the probability of having them at the country level. We find that in election years with fiscal rules in place, public consumption is reduced by 1.6 percentage point of GDP as compared to election years without these rules. This impact is equivalent to a reduction by a third of the volatility of public consumption in our sample. Furthermore, the effectiveness of these rules depends on their type, their institutional design, whether they have been in place for a long time and finally on the degree of competitiveness of elections.


The Impact of Profit Shifting on Economic Activity and Tax Competition, Working Paper No. 19/287

By Alexander D Klemm & Li Liu

A growing empirical literature has documented significant profit shifting activities by multinationals. This paper looks at the impact of such profit shifting on real activity and tax competition. Real activity can be affected as profit shifting changes—and theoretically most likely reduces—the cost of capital. Tax competition, even over real capital, is affected, because a permissive attitude toward profit shifting can be seen as a selective tax reduction for multinationals. Tightening profit shifting rules in turn can affect tax competition through the main rate. This paper discusses these issues theoretically and with the help of a simulation to assess the impact of profit-shifting on investment, revenues, and government behavior. Using the theoretical framework, it also provides a brief overview of the related empirical literature.


Hidden Treasure: The Impact of Automatic Exchange of Information on Cross-Border Tax Evasion, Working Paper No. 19/286

By Sebastian Beer, Maria Delgado Coelho & Sebastien Leduc

We analyze the impact of exchange of information in tax matters in reducing international tax evasion between 1995 and 2018. Based on bilateral deposit data for 39 reporting countries and more than 200 counterparty jurisdictions, we find that recent automatic exchange of information frameworks reduced foreign-owned deposits in offshore jurisdictions by an average of 25 percent. This effect is statistically significant and, as expected, much larger than the effect of information exchange upon request, which is not significant. Furthermore, to test the sensitivity of our findings, we estimate countries’ offshore status and the impact of information exchange simultaneously using a finite mixture model. The results confirm that automatic (and not upon request) exchange of information impacts cross-border deposits in offshore jurisdictions, which are characterized by low income tax rates and strong financial secrecy.


Disposal is Not Free: Fiscal Instruments to Internalize the Environmental Costs of Solid Waste, Working Paper No. 19/283

By Thornton Matheson

This paper provides an overview of global solid waste generation, its environmental costs, and fiscal instruments that can be used to encourage waste reduction and finance proper disposal. Countries—especially island nations–struggle to manage an ever-increasing volume of solid waste, generation of which is projected to exceed 2 billion tons a year by 2025. Although solid waste management is usually relegated to subnational governments, externalities from inadequate management, which include greenhouse gas emissions and ocean plastic pollution, reach global scale. National governments thus play a critical role in creating incentives for waste minimization and ensuring adequate resources for proper waste management. This paper evaluates potential fiscal instruments to achieve these goals, particularly in developing country policy environments.


Productivity and Tax Evasion, Working Paper No. 19/260

By Era Dabla-Norris, Mark Gradstein, Fedor Miryugin & Florian Misch

The extent of tax compliance has important implications for revenue yield, efficiency and the fairness of any tax system. Tax evasion undermines revenue collection, distorts competition, and undermines a country’s development prospects. In this paper, we investigate whether higher productivity causally leads to lower tax evasion. We first present stylized facts consistent with this view and develop a model that illustrates one potential transmission channel. Second, we test the model predictions at the firm level using the self-reported share of declared income as proxy for tax evasion for a large sample of emerging and developing economies. Our results suggests that productivity improvements by firms can lead to lower tax evasion.

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