Fiscal Policy and Debt Dynamics in Developing Countries

Using a new tax database for 28 countries and a variety of econometric methods, this paper contributes to the debate on the effects of fiscal policy on economic activity in a number of ways. The analysis finds that tax cuts have a stimulative effec...

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Main Author:	Ilzetzki, Ethan
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ADDED TAX AUTOREGRESSION BOND CD CLOSED ECONOMIES CORPORATE INCOME TAX CORPORATE TAX CORPORATE TAX RATE CORPORATE TAXES DEBT DEBT ACCUMULATION DEDUCTIONS DEVELOPING COUNTRIES DEVELOPMENT POLICY ECONOMIC OUTLOOK ELASTICITY EXCHANGE RATE EXPENDITURES FEDERAL TAX FISCAL POLICY FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN CURRENCY GDP GINI COEFFICIENT GOVERNMENT ACCOUNTS GOVERNMENT EXPENDITURE GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOUSEHOLD INCOME INCOME TAX INCOME TAXES INFLATION INTEREST PAYMENTS INTEREST RATE INTERNATIONAL BANK INTERNATIONAL FINANCE M2 MACROECONOMICS MULTIPLIERS NET DEBT OPEN ECONOMIES OUTPUT PERSONAL INCOME PERSONAL INCOME TAX PERSONAL INCOME TAXES PROGRESSIVE TAX PUBLIC FINANCE REGRESSIVE TAX SALES TAX SALES TAXES SOCIAL SECURITY TAX STATUTORY TAX STATUTORY TAX RATES TAX TAX BRACKETS TAX CHANGES TAX CREDIT TAX CUTS TAX RATE TAX RATES TAX REVENUE TAX REVENUES TRADING UNEMPLOYMENT UNEMPLOYMENT RATE VALUE ADDED VALUE ADDED TAX WORLD DEVELOPMENT INDICATORS
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110519140736 http://hdl.handle.net/10986/3429

id	okr-10986-3429
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spelling	okr-10986-34292021-04-23T14:02:09Z Fiscal Policy and Debt Dynamics in Developing Countries Ilzetzki, Ethan ADDED TAX AUTOREGRESSION BOND CD CLOSED ECONOMIES CORPORATE INCOME TAX CORPORATE TAX CORPORATE TAX RATE CORPORATE TAXES DEBT DEBT ACCUMULATION DEDUCTIONS DEVELOPING COUNTRIES DEVELOPMENT POLICY ECONOMIC OUTLOOK ELASTICITY EXCHANGE RATE EXPENDITURES FEDERAL TAX FISCAL POLICY FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN CURRENCY GDP GINI COEFFICIENT GOVERNMENT ACCOUNTS GOVERNMENT EXPENDITURE GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOUSEHOLD INCOME INCOME TAX INCOME TAXES INFLATION INTEREST PAYMENTS INTEREST RATE INTERNATIONAL BANK INTERNATIONAL FINANCE M2 MACROECONOMICS MULTIPLIERS NET DEBT OPEN ECONOMIES OUTPUT PERSONAL INCOME PERSONAL INCOME TAX PERSONAL INCOME TAXES PROGRESSIVE TAX PUBLIC FINANCE REGRESSIVE TAX SALES TAX SALES TAXES SOCIAL SECURITY TAX STATUTORY TAX STATUTORY TAX RATES TAX TAX BRACKETS TAX CHANGES TAX CREDIT TAX CUTS TAX RATE TAX RATES TAX REVENUE TAX REVENUES TRADING UNEMPLOYMENT UNEMPLOYMENT RATE VALUE ADDED VALUE ADDED TAX WORLD DEVELOPMENT INDICATORS Using a new tax database for 28 countries and a variety of econometric methods, this paper contributes to the debate on the effects of fiscal policy on economic activity in a number of ways. The analysis finds that tax cuts have a stimulative effect on economic growth in developing countries. Lowering the personal income tax rate by 1 percentage point, or cutting revenues by 1 percent of gross domestic product increases gross domestic product by 0.3-0.4 percent on impact and 0.8 percent in the long run. The author finds that cuts in personal income taxes are more effective in stimulating growth than cuts in corporate or valued added tax rates. The author incorporates debt dynamics into a fiscal vector autoregression model for a number of developing countries. Existing estimates of the effects of fiscal policy on growth use linear time-series methods, which may assess the effects of fiscal policy along a debt-path that is unsustainable. Incorporating the non-linear relationship between government expenditure, taxes, and debt alters estimates of the impact of fiscal policy on gross domestic product in several countries. In Brazil, for example, conventional time-series methods may overstate the effects of fiscal policy on gross domestic product, by ignoring the detrimental effects of debt accumulation. 2012-03-19T18:02:18Z 2012-03-19T18:02:18Z 2011-05-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110519140736 http://hdl.handle.net/10986/3429 English Paper is funded by the Knowledge for Change Program (KCP),Policy Research working paper ; no. WPS 5666 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region The World Region
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ADDED TAX AUTOREGRESSION BOND CD CLOSED ECONOMIES CORPORATE INCOME TAX CORPORATE TAX CORPORATE TAX RATE CORPORATE TAXES DEBT DEBT ACCUMULATION DEDUCTIONS DEVELOPING COUNTRIES DEVELOPMENT POLICY ECONOMIC OUTLOOK ELASTICITY EXCHANGE RATE EXPENDITURES FEDERAL TAX FISCAL POLICY FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN CURRENCY GDP GINI COEFFICIENT GOVERNMENT ACCOUNTS GOVERNMENT EXPENDITURE GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOUSEHOLD INCOME INCOME TAX INCOME TAXES INFLATION INTEREST PAYMENTS INTEREST RATE INTERNATIONAL BANK INTERNATIONAL FINANCE M2 MACROECONOMICS MULTIPLIERS NET DEBT OPEN ECONOMIES OUTPUT PERSONAL INCOME PERSONAL INCOME TAX PERSONAL INCOME TAXES PROGRESSIVE TAX PUBLIC FINANCE REGRESSIVE TAX SALES TAX SALES TAXES SOCIAL SECURITY TAX STATUTORY TAX STATUTORY TAX RATES TAX TAX BRACKETS TAX CHANGES TAX CREDIT TAX CUTS TAX RATE TAX RATES TAX REVENUE TAX REVENUES TRADING UNEMPLOYMENT UNEMPLOYMENT RATE VALUE ADDED VALUE ADDED TAX WORLD DEVELOPMENT INDICATORS
spellingShingle	ADDED TAX AUTOREGRESSION BOND CD CLOSED ECONOMIES CORPORATE INCOME TAX CORPORATE TAX CORPORATE TAX RATE CORPORATE TAXES DEBT DEBT ACCUMULATION DEDUCTIONS DEVELOPING COUNTRIES DEVELOPMENT POLICY ECONOMIC OUTLOOK ELASTICITY EXCHANGE RATE EXPENDITURES FEDERAL TAX FISCAL POLICY FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN CURRENCY GDP GINI COEFFICIENT GOVERNMENT ACCOUNTS GOVERNMENT EXPENDITURE GOVERNMENT REVENUE GROSS DOMESTIC PRODUCT HOUSEHOLD INCOME INCOME TAX INCOME TAXES INFLATION INTEREST PAYMENTS INTEREST RATE INTERNATIONAL BANK INTERNATIONAL FINANCE M2 MACROECONOMICS MULTIPLIERS NET DEBT OPEN ECONOMIES OUTPUT PERSONAL INCOME PERSONAL INCOME TAX PERSONAL INCOME TAXES PROGRESSIVE TAX PUBLIC FINANCE REGRESSIVE TAX SALES TAX SALES TAXES SOCIAL SECURITY TAX STATUTORY TAX STATUTORY TAX RATES TAX TAX BRACKETS TAX CHANGES TAX CREDIT TAX CUTS TAX RATE TAX RATES TAX REVENUE TAX REVENUES TRADING UNEMPLOYMENT UNEMPLOYMENT RATE VALUE ADDED VALUE ADDED TAX WORLD DEVELOPMENT INDICATORS Ilzetzki, Ethan Fiscal Policy and Debt Dynamics in Developing Countries
geographic_facet	The World Region The World Region
relation	Paper is funded by the Knowledge for Change Program (KCP),Policy Research working paper ; no. WPS 5666
description	Using a new tax database for 28 countries and a variety of econometric methods, this paper contributes to the debate on the effects of fiscal policy on economic activity in a number of ways. The analysis finds that tax cuts have a stimulative effect on economic growth in developing countries. Lowering the personal income tax rate by 1 percentage point, or cutting revenues by 1 percent of gross domestic product increases gross domestic product by 0.3-0.4 percent on impact and 0.8 percent in the long run. The author finds that cuts in personal income taxes are more effective in stimulating growth than cuts in corporate or valued added tax rates. The author incorporates debt dynamics into a fiscal vector autoregression model for a number of developing countries. Existing estimates of the effects of fiscal policy on growth use linear time-series methods, which may assess the effects of fiscal policy along a debt-path that is unsustainable. Incorporating the non-linear relationship between government expenditure, taxes, and debt alters estimates of the impact of fiscal policy on gross domestic product in several countries. In Brazil, for example, conventional time-series methods may overstate the effects of fiscal policy on gross domestic product, by ignoring the detrimental effects of debt accumulation.
format	Publications & Research :: Policy Research Working Paper
author	Ilzetzki, Ethan
author_facet	Ilzetzki, Ethan
author_sort	Ilzetzki, Ethan
title	Fiscal Policy and Debt Dynamics in Developing Countries
title_short	Fiscal Policy and Debt Dynamics in Developing Countries
title_full	Fiscal Policy and Debt Dynamics in Developing Countries
title_fullStr	Fiscal Policy and Debt Dynamics in Developing Countries
title_full_unstemmed	Fiscal Policy and Debt Dynamics in Developing Countries
title_sort	fiscal policy and debt dynamics in developing countries
publishDate	2012
url	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110519140736 http://hdl.handle.net/10986/3429
_version_	1764386983953563648

Fiscal Policy and Debt Dynamics in Developing Countries

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