The Built-In Flexibility of Income and Consumption Taxes in OECD Countries

The Built-In Flexibility of Income and Consumption Taxes in OECD Countries

Binhan Elif Yılmaz (İstanbul University, Turkey) and Sinan Ataer (İstanbul University, Turkey)
DOI: 10.4018/978-1-5225-2245-4.ch010
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Abstract

Compatible with a variety of cyclical fluctuations in fiscal policy, is the automatic stabilising fiscal policies. There is a need to calculate the income elasticity of tax for relieving the effects of cyclical fluctuations. Income elasticity of tax, that is tax revenue have relative change, the ratio of the relative change in national income. This ratio must be bigger than 1 to label a tax system as elastic. If this ratio is bigger than 1, this situation also show the tax system has an automatic stabilizing feature. By that way, without any changes in tax structure, tax revenues increase in the deflation times and decrease in the inflation times. The automatically compensatory movement of tax revenues, generally referred to as “built-in flexibility”, has received increasing attention. The aim of this study is examining the existence of automatic stabilizers in the OECD countries by evaluating the income elasticity of income and consumption taxes and by making cross-countries comparatives.
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Automatic Stabilizer Fiscal Policy And Built-In Flexibility

Automatic stabilizer fiscal policy, attaches importance the impact of revenue and expenditure programs on the national income and accepts the annual balanced budget worsens the economic stability and public expenditures also cause prodigality. On the other hand, this policies worry about uncertainty that brought by the volitive fiscal policies and emphasize on the political obstacles and shortsightedness of such policies. Especially they are afraid of not to leave the programs that implemented in the depression times when the full employment occurs (Due, 1967: p. 559).

Automatic stabilizer fiscal policies has an important role on reducing the economic instabilities. By extending the application field of such policies, the need for direct measures which create uncertainties would be decrease (Due, 1967: p. 560).

In the case of existence of automatic stabilizers, there would be no need to measures and recognitions of political and managerial decision-makers for eliminating the cyclical fluctuations. With this solution, an immediate intervention occurs to solve the problem, without any lag in recognition or harvesting the results of measures (Türk, 2008: p. 103).

Automatic stabilizers are integrated in the economic system as public expenditures or taxes which relieve cyclical fluctuations in the economy.

Taxes, it is an automatic stabilizer. There is a need to calculate the income elasticity of tax for relieving the effects of cyclical fluctuations. Income elasticity of tax, that is tax revenue have relative change, the ratio of the relative change in national income (T=Tax revenue, Y=National income).

Key Terms in this Chapter

Fiscal Drag: Growth in nominal incomes, with a fixed tax structure, raises the average tax rate facing individuals, causing income tax revenues to grow faster than incomes. This situation named as Fiscal Drag.

Income Elasticity of Tax: This term explains the ratio of relative change in the tax revenue and the relative change in the national income.

Built-in Flexibility: The automatically compensatory movement of tax revenues.

Tax Tariff: This term mentions about measure or measures set which must be applied to the basis of tax for calculating the exact amount of tax.

Compensatory Fiscal Policy: This policy is a program that offered by Keynesian economists. When the effective demand of the private sector is insufficient to ensure full employment, this policy makes contributions to find the balance point with the increases in government expenditures.

OECD Countries: The Organisation for Economic Co-operation and Development (OECD) is an international economic organisation of 34 countries, founded in 30 September 1961 to stimulate economic progress and world trade. OECD countries are Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.an international economic organisation of 34 countries, founded in 30 September 1961 to stimulate economic progress and world trade. OECD countries are Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.

Economic Stabilization: This term expresses maintaining the monetary, taxation and revenues policies without a negative effect to the market economy and its operations. In such situation all the macro-economic indicators would be in a harmony with each other.

Automatic Stabilizer: Automatic stabilizers are solutions as progressive taxes or unemployment wages which are balance economy by decreasing the government revenues and triggering the demand in the recession periods or by increasing the government revenues and restrict the demand in the inflationist periods.

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