Do output contractions cause investment in fiscal capacity ? by Christian Gillitzer
By: Gillitzer, Christian
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Material type: 
ArticlePublisher: 2017Subject(s): CAPACIDAD FISCAL | POLITICA FISCAL | BASE IMPONIBLE | IMPUESTOS | TIPOS DE GRAVAMEN | MODELOS ECONOMETRICOS
In:
American Economic Journal. Economic Policy v.9, n. 2, May 2017, p. 189-227Summary: This paper shows that an economic slump can induce a government toinvest in fiscal capacity. Large negative income shocks stress therevenue-raising capability of narrow tax bases, making an increase in tax base breadth desirable relative to its fixed implementation cost.A broader tax base enables revenue to be raised at lower tax rates, and so lower deadweight loss. The behaviorof US state governmentsduring the Great Depression supports the model: statesexperiencing larger than average negative income shocks were more likely to adopt a retail sales tax than were states experiencing smaller than average income shocks.
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This paper shows that an economic slump can induce a government toinvest in fiscal capacity. Large negative income shocks stress therevenue-raising capability of narrow tax bases, making an increase in tax base breadth desirable relative to its fixed implementation cost.A broader tax base enables revenue to be raised at lower tax rates, and so lower deadweight loss. The behaviorof US state governmentsduring the Great Depression supports the model: statesexperiencing larger than average negative income shocks were more likely to adopt a retail sales tax than were states experiencing smaller than average income shocks.
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