Growth and Volatility of Tax Revenues in Latin America

Against the backdrop of high macroeconomic instability and the need to meet the demands of public spending, we analyze the trade-off between growth and volatility of tax revenues in Latin America. Short-run and long-run elasticities for a sample of eleven economies are estimated accounting for state-dependent asymmetric reactions. Controlling for composition of revenue sources and other idiosyncrasies, we find revenues above (below) its long-run equilibrium to react stronger (weaker) to business cycle dynamics. Our detailed elasticity estimates can give some orientation on how to stably reach higher tax levels on the way to develop an adequate internal tax system. Hans Fricke: Swiss Institute for Empirical Economic Research (SEW), University of St. Gallen, Varnbüelstr. 14, CH-9000 St. Gallen, Switzerland ([email protected]) Corresponding Author: Bernd Süssmuth, Institute for Empirical Research in Economics (IEW), University of Leipzig, Grimmaische Str. 12, D-04109 Leipzig, Germany Email: [email protected], phone: +49 341 97 33782, fax: +49 341 97 33789 We would like to thank the editors, Arun Agrawal and Oliver T. Coomes, and four anonymous referees for many helpful comments and suggestions. We are also grateful for valuable comments and remarks by Bill Gentry, Estian Calitz, Daniel Buncic, Stephan Klasen, José Arroyo, Alexander Fink, Burkhard Heer, Pablo Duarte, David Leuwer, Bastian Gawellek, and participants of the Development Economics Seminar at the University of Göttingen. Hans Fricke acknowledges the hospitality of the Economic Development Department at ECLAC (Economic Commission for Latin America and the Caribbean), Santiago de Chile, where this project was initiated. In particular, thank is due to Juan Pablo Jiménez, Andrea Podestá, and Leandro Cabello for their encouragement and assistance in the project. We also thank Marco Sunder for his help in visualizing some of our results. The usual disclaimer applies.