Tax revenue instability and tax revenue in developed and developing countries

Abstract

Purpose This paper aims to explore the effect of non-resource tax revenue instability on non-resource tax revenue in developed and developing countries. Design/methodology/approach The analysis has used an unbalanced panel data set of 146 countries over the period 1981–2016, as well as the two-step system generalized methods of moment approach. Findings The empirical analysis has suggested that non-resource tax revenue instability influences negatively non-resource tax revenue share of gross domestic product. The magnitude of this negative effect is higher in less developed countries than in relatively advanced countries. This negative effect materializes through public expenditure instability: non-resource tax revenue instability exerts a higher effect on non-resource tax revenue share as the degree of public expenditure instability increases. Finally, non-resource tax revenue instability exerts a higher negative effect on non-resource tax revenue share as economic growth volatility rises, inflation volatility increases and terms of trade instability increases. Research limitations/implications The main policy implication of this analysis is that policies that help ensure the stability of non-resource tax revenue also contribute to improving countries’ non-resource tax revenue share. For example, governments’ measures that help cope with or prevent the severe adverse effects of shocks on economies (shocks that could translate into higher tax revenue instability) would ultimately help enhance countries’ tax revenue performance. Practical implications The severity of the current COVID-19 pandemic shock (which is a supply and demand shock) and the macroeconomic uncertainty that it has generated – inter alia, in terms of economic growth instability, terms of trade instability, inflation volatility and public expenditure instability – are likely to result in severe tax revenue losses. Governments in both developed and developing countries would surely learn from the management of this crisis so as to prepare for possible future economic, financial and health crises with a view to dampening their adverse macroeconomic effects, including here their negative tax revenue effects. Originality/value To the best of the author’s knowledge, this topic is being addressed in the empirical literature for the first time.

Assessment of the level and structure of stress in tax revenues of the federal and regional budgets

“…Stress indices primarily aim to forecast and identify economic crises, impacting various inr-economy.com R-ECONOMY, 2023, 9(4), 405-421 doi 10.15826/recon.2023.9.4.025 dicators, including taxes. The sensitivity of taxes to different crises is an important area of study for economists globally, with notable research by Gnangnon (2022) confirming the influence of tax revenue instability on GDP in both developed and developing countries based on an analysis of 146 countries from 1981-2016.…”

Unstable government revenues in uncertain times: which taxes are especially volatile?

“…Concurrently, they estimated that 1% increase in the tax revenue cyclicality transforms into smaller growth pace of 1/3 percentage point. Gnangon, who worked on a set of data for 146 countries for the period 1981-2016, arrived at the conclusion that instability of government revenues leads to a lower share of the tax revenues in GDP that transforms into public expenditure instability, whereas the negative effect is particularly visible among the less advanced economies (Gnangnon, 2022). Blanchard and Perotti (2002) indicated that the tax shocks affect investment, consumption and output.…”

Does Tax Revenue Improve Economic Complexity in Africa?

“…People with less disposable income due to higher taxes may be less likely to purchase goods and services. This can hurt government revenues, which are largely dependent on taxes levied on the consumption of goods and services by individuals and businesses (Gnangnon, 2022). Then, higher taxes can reduce the incentive for individuals and firms to invest and innovate.…”