We estimate short-and long-run tax elasticities that capture the relationship between changes in national income and tax revenue. We show that the shortrun tax elasticity changes according to the business cycle. We estimate a twostate Markov-switching regression on a novel data set of tax policy reforms in 15 European countries from 1980 to 2013, showing that the elasticities during booms and recessions are statistically (and often economically) different. The elasticities of personal income taxes, corporate income taxes, indirect taxes and social contributions tend to be larger during recessions. Estimates of long-run elasticities are in line with existing literature. Policy pointsr Estimating the change in tax revenue induced by a change in income -the so-called tax elasticity -is fundamental for government revenue forecasts. Fiscal Studiesr We use a two-state Markov-switching regression model that permits the tax elasticity to vary over the business cycle.r Our estimates show that there is a clear tendency for short-run elasticities of corporate income taxes, indirect taxes, social contributions and, to a lesser extent, personal income taxes to increase on average during recessions compared with booms.r The current EU framework requires member countries to estimate a cyclically adjusted budget balance and use constant tax elasticities. However, our results suggest that the elasticities change over the cycle and thus potentially complicate the cyclically adjusted balance estimation.

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