IMF Working Papers

Unpleasant Surprises? Elections and Tax News Shocks

Author/Editor:

Antonio David ; Can Sever

Publication Date:

June 30, 2023

Electronic Access:

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Summary:

Unanticipated changes in tax policy are likely to have different macroeconomic effects compared to anticipated changes due to several mechanisms, including fiscal foresight and policy uncertainty. It is therefore important to understand what drives such policy surprises. We explore the nature of unanticipated tax policy changes by focusing on a political economy determinant of those events, namely the timing of elections. Using monthly data for 22 advanced economies and emerging markets over the period 1990-2018, we show that implementation lags tend to be significantly longer for tax policy change announcements that are made during the pre-election periods, thereby leading to a lower likelihood of “tax news shocks”. We also find that implementation lags become much shorter for tax policy changes that are announced in the aftermath of elections, generating more frequent tax news shocks. This pattern remains similar for different tax measures or types of taxes. The findings are robust to a number of checks, including alternative definitions of tax news shocks, or to controlling for various economic and institutional factors.

Series:

Working Paper No. 2023/139

Subject:

Consumption taxes Corporate income tax Econometric analysis Fiscal policy Income tax systems Probit models Taxes

Frequency:

regular