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CNB > Economic research > Research publications > CNB Working paper series > 2015 > Dynamic Elasticities of Tax Revenue: Evidence from the Czech Republic

Dynamic Elasticities of Tax Revenue: Evidence from the Czech Republic

Tomáš Havránek, Zuzana Iršová, Jiří Schwarz

Tax revenue elasticities with respect to tax bases are key parameters for the modeling of public finances. Yet the existing studies estimating these elasticities for post-transition countries disregard the effects of tax reforms on tax revenue, which renders their estimates inconsistent. We use a unique data set from the Czech Republic to account for the effects of reforms and estimate both short- and long-run tax revenue elasticities. Our results suggest that the long-run elasticities are 1.4 for wage tax, 0.9 for value added tax, 1.7 for profit tax, and 1 for social security contributions. The adjustment process for value added tax and social security contributions is fast, but for the remaining two categories it is important to distinguish between the short- and long-run elasticities: the initial response of revenue to changes in the bases is weak. In the case of wage tax it takes half a year for the elasticity to surpass unity.

JEL codes: H24, H25, H27

Keywords: Elasticity, error correction models, tax base, tax revenue

Issued: November 2015

Download: CNB WP No. 8/2015 (pdf, 342 kB)