The International Monetary Fund (IMF) has recently released the following working papers on the topics of tax and fiscal policy.

By Agustin Velasquez and Svetlana Vtyurina. IMF Working Paper No. 19/130.

Hours worked vary widely across countries and over time. In this paper, we investigate the role played by taxation in explaining these differences for EU New Member States. By extending a standard growth model with novel data on consumption and labour taxes, we assess the evolution of trends in hours worked over the 1995-2017 period. We find that the inclusion of tax rates in the model significantly improves the tracking of hours. We also estimate the elasticity of hours (and its different margins) to quantify the deadweight loss introduced by consumption and labour taxes. We find that these taxes explain a large share of labour supply differences across EU New Member States and that the potential gains from policy actions are noteworthy.

By Juin-Jen Chang, Hsieh-Yu Lin, Nora Traum and Shu-Chun Susan Yang. IMF Working Paper No. 19/125.

A New Keynesian model with government production, public compensation, and unemployment is fit to U.S. data to study the macroeconomic and fiscal effects of public wage reductions. We find that accounting for the type of government spending is crucial for its macroeconomic implications. Although reductions in public wages and government purchases of goods have similar effects on total output and the fiscal balance, the former can raise private output slightly, in contrast to the substantial contractionary effects of the latter. In addition, the baseline estimation finds that exogenous public wage reductions decrease private wages. Model counterfactuals show that sufficiently rigid nominal private wages can reverse the response of private wages, as the rigidity dampens the labour reallocation effect from the public to private sector that exerts downward pressure on private wages.

By Emanuel Kopp, Daniel Leigh, Susanna Mursula and Suchanan Tambunlertchai. IMF Working Paper No. 19/120.

There is no consensus on how strongly the Tax Cuts and Jobs Act (TCJA) has stimulated U.S. private fixed investment. Some argue that the business tax provisions spurred investment by cutting the cost of capital. Others see the TCJA primarily as a windfall for shareholders. We find that U.S. business investment since 2017 has grown strongly compared to pre-TCJA forecasts and that the overriding factor driving it has been the strength of expected aggregate demand. Investment has, so far, fallen short of predictions based on the postwar relation with tax cuts. Model simulations and firm-level data suggest that much of this weaker response reflects a lower sensitivity of investment to tax policy changes in the current environment of greater corporate market power. Economic policy uncertainty in 2018 played a relatively small role in dampening investment growth.

By David Amaglobeli, Laura Jaramillo, Pooja Karnane and Aleksandra Zdzienicka. IMF Working Paper No. 19/113.

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 stabilisation.

By Vivian Malta, Lisa L Kolovich, Angelica Martinez and Marina Mendes Tavares. IMF Working Paper No. 19/112.

In sub-Saharan Africa women work relatively more in the informal sector than men. Many factors could explain this difference, including women’s lower education levels, legal barriers, social norms and demographic characteristics. Cross-country comparisons indicate strong associations between gender gaps and higher female informality. This paper uses microdata from Senegal to assess the probability of a worker being informal, and our main findings are: (i) in urban areas, being a woman increases this probability by 8.5 percent; (ii) education is usually more relevant for women; (iii) having kids reduces men’s probability of being informal but increases women’s.

By Tokhir N Mirzoev and Ling Zhu. IMF Working Paper No. 19/108.

We examine the existing fiscal policy paradigm in commodity-exporting countries. First, we argue that its centrepiece—the permanent income hypothesis (PIH)—is not consistent with either intergenerational equity or long-term sustainability in the presence of uncertainty. Policies to achieve these goals need to be more prudent and better anchored than the PIH. Second, we point out the presence of a volatility tradeoff between government spending and wealth and re-assess long-held views on the appropriate fiscal anchors, the vice of procyclicality, and the (im)possibility of simultaneously smoothing consumption and ensuring intergenerational equity and sustainability. Finally, we propose what we call a prudent wealth stabilisation policy that would be more consistent with long-term fiscal policy goals, yet relatively simple to implement and communicate.

By Bernardin Akitoby, Jiro Honda, Hiroaki Miyamoto, Keyra Primus and Mouhamadou Sy. IMF Working Paper No. 19/104.

How can Low-Income Countries (LICs) enhance tax revenue collection to finance their vast development needs? We address this question by analysing seven tax reform experiences in LICs (Burkina Faso, The Gambia, Maldives, Mauritania, Rwanda, Senegal, and Uganda). Three lessons stand out, although reforms must be tailored to individual circumstances: (i) Tax reforms require first and foremost political commitment and buy-in from key stakeholders; (ii) Countries that pursue both revenue administration and tax policy reforms tend to see much larger and persistent gains; and (iii) A successful strategy often starts with fiscal reform measures with immediate effect to build momentum. These can include: simplifying the tax system; curbing exemptions; reforming indirect taxes on goods and services (e.g., excises); and better managing compliance risks through strengthening taxpayer segmentation (often beginning with strengthening the Large Taxpayers Office). A comprehensive reform strategy (e.g., a medium-term revenue strategy) can help to properly sequence reform measures and facilitate their implementation.

(Source: IMF Working Papers).

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