The Role of Income Tax Progressivity in GDP Smoothening: Empirical Analysis

• Thesis title in Czech: The Role of Income Tax Progressivity in GDP Smoothening: Empirical Analysis
• Thesis title in English: The Role of Income Tax Progressivity in GDP Smoothening: Empirical Analysis
• Key words: daňová progrese, volatilita HDP, automatické stabilizátory, BMA
• English key words: tax progressivity, GDP volatility, Automatic stabilizers, BMA
• Academic year of topic announcement: 2016/2017
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 09.11.2016
• Date of assignment: 09.11.2016
• Date and time of defence: 22.06.2017 08:30
• Venue of defence: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Date of electronic submission: 12.05.2017
• Date of proceeded defence: 22.06.2017
• Opponents: doc. Ing. Tomáš Cahlík, CSc.

Guidelines

One of the main goals of political representation is to avoid high volatility of GDP and ensure long-term smooth growth of the economy. Aproper fiscal policy might offer few automatic stabiliser of the business cycle fluctuations. Such stabiliser is and countercyclical tool that works automatically and immediately (unemployment benefits). For example, it has been shown that the size of the government is negatively correlated with GDP fluctuations (Fatas, A., Mihov, I., 2001) an therefore serves as a good automatic stabiliser. However, the evidence is not strong in case of tax progressivity, even though it behaves counter cyclically, as well. Let’s suppose the income tax is progressive. Than the tax liabilities decreases by higher proportion than the taxable income, during the economic down-turn, leaving free resources in the economy. Vice-versa the tax liabilities grow faster, than taxable income if the economy is growing resulting in less volatile GDP (Attinasi, M. G. et al., 2011). The progressive income tax leaves more resources to the households at the expanse of the government in the slowdown and vice versa. The question should not be just if the tax progressivity works as an automatic stabiliser, but also how and through which channels. As the consumption of households is more sensitive to changes in disposable income than government expenditures, I believe the most significant (negative) correlation is between the volatility of consumption and tax progressivity. It will be also interesting to analyse this stabilisation effect for different group of countries such as: developing x developed or European (continental) x Anglo Saxon countries.

1. Hypothesis #1: There is a significant correlation between tax progressivity and GDP volatility
2. Hypothesis #2: If we decompose the GDP the correlation is the most significant between tax progressivity and consumption volatility.
3. Hypothesis #3: The effect of automatic stabilisation of tax progressivity is higher and more significant in developed European countries.


To conduct this research I first need to find a proper measure of tax progressivity. Attinasi, M. G. et al., (2011) uses index of progressivity based on the ratio of marginal tax rate and average tax rate of average production worker. This offers only limited description of progressivity so I will also rely on forthcoming Plato index developed by A. Cobham, E.V.K. FitzGeral and P. Janský and defined as the ratio of non-corporate direct tax paid to the gross income of top quintile households (direct tax includes social security payments). I will than evaluate the differences in results of individual measures. The data on GDP, consumption, government expenditures and investments will be searched at the World bank databases, which offers these data for many developed and developing countries for few decades. I expect to collect panel dataset including newest data for 2014. The final data set will be examined by standard econometric models as pooled OLS, fixed effect, random effect as well as assessing simple correlations. Based on the results I will also employ some grouping of individual years. As the dependent variable I will not use only the GDP volatility, but also consumption volatility, investments volatility and government expenditure volatility. Such decomposition of GDP volatility will allow me to better explain the GDP smoothening.


Moldovan, R. (2010) studies the role of taxes as automatic stabiliser in context of neoclassical model with monopolistic competition, however, the empirical analysis of real data is still needed. To my knowledge Attinasi, M. G. et al., (2011) is the only paper empirically assessing the role of tax progressivity on GDP volatility, using real macroeconomic data. In previous works, the statement that progressivity of income taxes might behave as automatic stabiliser was somehow minor and not very well explained or studied. My contribution will be in employing another robust measure of tax progressivity, the Plato index, collecting new data (including years of financial crisis) for larger, not only OECD, number of countries. This new dataset will offer another results that will be compared to existing results from Attinasi, M. G. et al., (2011). Further, I will decompose the GDP volatility, so my thesis should offer better understanding of the role of tax progressivity in GDP smoothening. I am also going to compare the magnitudes of the studied effect for different groups of countries (i.e. developing x developed, continental Europe x Anglo Saxon countries). This should shed some more light on the problematic.

References

Attinasi, M. G. et al., (2011) - ECB Working Paper No. 1380


Debrun, X., and R. Kapoor (2010): “Fiscal Policy and Macroeconomic Stability:Automatic Stabilizers Wor

Dolls,M. et al.,(2012)- Automatic stabilizers and economic crisis: US vs. Europe, Elsevier, vol. 96(3), pages 279-294.

Fatás, A., and I. Mihov (2001): “Government size and automatic stabilizers: international and intranational evidence,” Journal of International Economics, 55(1), 3 — 28.

Moldovan, I. R. (2010): “Countercyclical taxes in a monopolistically competitive environment,” European Economic Review, 54(5), 692 — 717.

Preliminary scope of work

1. Introduction – motivation and overview of the paper
2. Literature review – I will present recent research in this field and its characteristics
3. Theoretical background – description of relevant theory
4. Data – data sources and descriptive statistics
5. Methodology – Presentation and justification of models and methods used in the paper
6. Results and robustness checks
7. Conclusion