A key problem in tax surveys is that quantitative information is often only available for tax rates and not for the tax base.
Laura Kawano and Joel B. Slemrod published an important article in 2016, in which they criticize earlier studies assessing the Laffer curve for corporate income tax (Kawano and Slemrod 2016). These studies usually indicated stronger regression of corporate tax revenues than in enterprises. However, Kawano and Slemrod have shown that these studies ignore information about the fundamentals of corporate taxation – which are systematically changing with rates.
The work of Kawano and Slemroda illustrates a key problem in tax studies, namely the fact that quantitative information is often only available in relation to tax rates and not to the tax base. To address this weakness, alternative tax indicators, such as completed tax payments, were used in the research to measure the combined effect of tax rates and tax bases. For example, in taxation and economic growth studies, the tax-to-GDP ratio was generally used as an independent variable for measuring tax burdens. However, the interpretation of such a relation must also take into account changes in GDP.
To address these methodological issues, the IMF developed a new database on tax policy reforms (TPRD), which was made publicly available for research in April 2018. It uses text analysis techniques to extract detailed information about previous tax policy reforms. in 23 countries over four decades, based on over 900 OECD reports and 37 thousand press cuts from the International Bureau of Fiscal Documentation (IBFD). The TPRD report’s information on changes in the tax rate and tax base, the dates of the announcement and implementation of reforms, whether the measures are implemented over many years or not, whether the reforms were large or small, or implemented as part of the fiscal consolidation package.
The TPRD database can be used to draw conclusions about systematic trends in taxation and for comparative analysis of individual countries. For example, it shows that 23 countries covered by the study have implemented on average 130 tax reforms over the past few decades, mainly in personal income tax and corporate income tax systems. At the top of the list were France and Italy with more than 200 reforms, while the smallest number – less than 50 reforms – was recorded in Brazil and the Czech Republic. Most reforms regarding personal income tax and corporate income tax were changes in the tax base. In contrast, in the case of value-added tax (VAT), most of the reforms were changes in the tax rate. The average delay between the announcement and the implementation of the reform was 150 days, but there was a wide variation. Interestingly, contrary to popular belief, the reduction of corporate tax rates in the recent period was associated with a simultaneous narrowing of the tax base of legal entities. Amaglobeli and others (2018) give more detailed information on the subject in their work.
Solving methodological problems
The TPRD database can also be used to solve some of the methodological problems found in previous tax studies and allows researchers to analyze new issues. Here are some examples. Initially, taxation and growth.
First of all, the TPRD database contains information on whether tax reforms were implemented during the fiscal consolidation period (there is a higher probability that the tax reform will not be related to the business cycle). This allows circumvention of endogeneity problems and therefore gives a higher probability of obtaining unweighted estimates.
Secondly, the TPRD database distinguishes not only individual categories of taxes but also distinguishes between the change of the tax rate and the change in the tax base. The latter turns out to be significant (Dabla-Norris and Lima 2018). Tax rate increases are associated with significantly larger negative effects on long-term growth (both production and employment) than reforms expanding the tax base. What’s more, short-term tax multipliers turn out to be much higher if they result from changes in tax rates than in the case of changes in tax bases.
The TPRD database also allows you to enrich the analysis in the field of tax competition. As shown in his work, Hebous et al. (2018):
– by analyzing how countries react to the announcements and implementation of reforms;
– by analyzing the effects of changes in the tax base;
– by examining whether countries are also competing with each other by means of their tax bases.
The TPRD databases are also used to look for answers to many other tax issues, some of which are currently being investigated by IMF employees. For example, it is planned to look at the political economy of tax reforms: how do tax reforms affect elections and whether elections influence the announcement, implementation, and reversal of reforms? It also analyzes whether individual tax reforms have different implications than tax reform packages, and also look at the specific effects of tax reforms during economic crises.