VAT revenue elasticities: an analytical approach. ESRI WP596, September 2018

Acheson, Jean and Deli, Yota and Morgenroth, Edgar L. W. and Lambert, Derek and Murphy, Martin (2018) VAT revenue elasticities: an analytical approach. ESRI WP596, September 2018. [Working Paper]

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Abstract

In this paper we construct analytical estimates of the elasticity of VAT revenue with respect to underlying gross income and expenditure for the household sector in Ireland. The responsiveness of VAT revenue to changes in gross income steadily increased up to the late 2000s as marginal income tax rates fell. The introduction of the income levy and the doubling of the health levy resulted in a reduction in the VAT elasticity, as higher income tax rates also reduced the disposable income available for expenditure. This spill-over effect highlights the importance of judging the broader implications of tax policy. It also suggests that policymakers during any subsequent fiscal crisis should be cautious when choosing the composition of tax adjustments, as there is a clear trade-off to be made. The VAT revenue elasticity is lower for Ireland than estimates for the UK, New Zealand and Australia, possibly reflecting the greater progressivity of the Irish income tax system compared to other OECD countries.

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