Do Output Contractions Cause Investment in Fiscal Capacity?
American Economic Journal: Economic Policy
vol. 9,
no. 2, May 2017
(pp. 189-227)
Abstract
This paper shows that an economic slump can induce a government to invest in fiscal capacity. Large negative income shocks stress the revenue-raising capability of narrow tax bases, making an increase in tax base breadth desirable relative to its fixed implementation cost. A broader tax base enables revenue to be raised at lower tax rates, and so lower deadweight loss. The behavior of US state governments during the Great Depression supports the model: states experiencing larger than average negative income shocks were more likely to adopt a retail sales tax than were states experiencing smaller than average income shocks.Citation
Gillitzer, Christian. 2017. "Do Output Contractions Cause Investment in Fiscal Capacity?" American Economic Journal: Economic Policy, 9 (2): 189-227. DOI: 10.1257/pol.20150161Additional Materials
JEL Classification
- E32 Business Fluctuations; Cycles
- E62 Fiscal Policy
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H71 State and Local Taxation, Subsidies, and Revenue
- N42 Economic History: Government, War, Law, International Relations, and Regulation: U.S.; Canada: 1913-
- N92 Regional and Urban History: U.S.; Canada: 1913-
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