Reconsidering time, this sign might not only depend on more
or less time-invariant idiosyncratic characteristics of a country
but also on the phase of the business cycle it is facing. Households,
firms, or, in general, economic actors might change their
behavior depending on different phases of the cycle. For example,
households might under-proportionally cut down consumption
of basic needs goods during recessions, while
spending proportionally more (less) on other goods during
expansions (contractions). Under these circumstances, overall
VAT revenues react less pronounced to changes in GDP during
downturn phases than during expansion. Likewise if labor market
turnover increases more during periods of acceleration than
it is slowing down in downturns, the short-run elasticity of PIT is
likely to be higher in boom than in bust.
The present study contributes to the literature by applying
recently developed econometric techniques to estimate
short-run and long-run elasticities of tax revenues in Latin
America, accounting for asymmetric reactions of short-run
elasticities over the business cycle. Considering the composition
of the revenues of PIT, CIT, internal and external
VAT, social security contributions, and revenues from commodities
exploitation, 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 reach necessary higher tax
levels evading sudden stops in revenues due to business cycle
instabilities on the way to develop an adequate internal
tax system.
The remainder of the paper is organized as follows. Section 2
describes the recent development of tax collection in Latin