The Ecology of Tax Systems by Vito Tanzi

Author:Vito Tanzi
Language: eng
Format: epub
ISBN: 9781788116862
Publisher: Edward Elgar
Published: 2018-03-14T00:00:00+00:00

III. TAX WINDFALLS BEFORE THE GREAT RECESSION

The previous section presented various reasons why the facility with which, until the 1980s, the governments of many countries were able to raise tax levels had been challenged in more recent years. However, by the time the new millennium arrived, several countries had been experiencing some declines in their tax ratios, rather than increases. This may have indicated that a new trend toward lower tax levels had established itself. Then came the bubble years in several economies that affected several countries.

The “bubbles”, financed by easy loans, developed in some sectors of the economies, and in several countries, in the first decade of the third millennium (generally starting around 2002–2003). They inflated the incomes of some sectors (especially housing and finance) and created artificial economic growth for those sectors, and windfall tax revenue for governments. The economies of the bubble countries would grow faster during those bubble years than they would have grown without the bubbles. And the countries would collect more tax revenue than they would have without the bubbles. These revenue windfalls would lead some economists after the financial crisis to maintain that the public finances had had little or nothing to do with the economic crisis that developed after 2007. Spain and Ireland were specifically mentioned as countries that had had relatively good public accounts before the crisis but that still got into difficulties.

The tax windfalls derived from the “bubbles” were particularly significant in Iceland, Ireland, Portugal, Spain, the United Kingdom, and the United States, among the countries that were most affected by the crisis. However, other countries may also have experienced bubble-connected revenue increases. The table in the Appendix (Table 6.A1) provides some statistics for the tax revenue for these countries.

For the period that ran from 2003–2004 to 2007–2008, the period before the financial crisis, the table indicates the effect that the bubbles may have had on tax revenue, and especially on taxes from personal income and from profits. Some countries received tax windfalls that exceeded 3 percent of GDP. For this period, and for these countries, the tax windfall largely obscured the longer-run trends that had been weakening the tax systems, and that were discussed earlier. They made the fiscal accounts of these countries look healthier than they should have looked and closer to the Maastricht rule on fiscal deficits. The bubble also distorted the growth rates of the economies.

It was inevitable that once the bubbles burst the same countries would experience sharp revenue losses, losses that were out of proportion to the falls in these countries’ GDPs. In the extreme cases of Iceland and Spain, the revenue losses were 7.6 and 6.6 percent of GDP respectively (see Table 6.A1). In Ireland and the United States they were almost 4 percent of GDP. In the United Kingdom and Portugal they were about 2 percent of GDP. Some cities, especially London and New York, were also much affected. In some countries the “collection lags” that characterize some taxes (especially corporate income and property taxes) delayed the full tax effect of the bursting bubbles.

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