Tax elasticity to business cycle: an overview of three taxes from 1979 to 2013 in France

Taxes in France have not always increased as anticipated, since tax revenue was sometimes higher than expected, for instance during the “jackpot” episode in 1999, or lower than expected, in 2009 and more recently in 2013. The purpose of this study is to examine the sensitivity of the three main State taxes in France to the business cycle over the 1979-2013 period: the personal income tax (PIT), the value added tax (VAT), and the corporate income tax (CIT). First these taxes need to be corrected for the effects of discretionary measures, which partly influence how taxes grow. Second, the elasticities of these taxes, broadly measured under an unchanged tax system, are estimated. Starting with a simple model to estimate the instantaneous elasticity of each tax to GDP, more complex specifications relying on the existing literature are then tested, in order to acknowledge sensitivity of each tax to the economic environment. According to our results, PIT revenues instantaneous elasticity to an activity shock is almost equal to one if annual inflation adjustments are considered as automatic rather than discretionary. VAT revenues behave almost in a similar way. However this response to activity is slightly stronger when stemming from a shock on volume rather than a shock on price. The CIT is a tax based on the previous year, but it is very sensitive to instantaneous shock, thus acting as a stabilizer. It is also sensitive to asset prices.