The short- and long-run tax revenue response to changes in tax bases

Abstract

This paper examines the short- and long-run behavior of tax receipts with regard to their tax bases. In addition, the possibility of asymmetries in tax responses is explicitly included. The methodology is applied to the three main tax categories in the Netherlands for the period 1971-2005, after removing effects from discretionary measures. The outcomes indicate that short-term elasticities can deviate markedly from long-term ones. Furthermore, short-term elasticities tend to be smaller in less favorable circumstances. Ignoring such differences between various elasticity measures may contribute to adverse revenue surprises.Tax revenue, income elasticity, fiscal indicators, The Netherlands