ifo Study: Governments Often Respond to Crises by Raising Taxes
In the wake of national crises, such as financial crises or natural disasters, governments often raise taxes. This is the finding of a new study conducted by the ifo Institute. “The majority of tax increases made due to crises happen very quickly, either while the crisis is still happening or in the following year,” says Prof. Niklas Potrafke, Director of the ifo Center for Public Finance and Political Economy.
Taxes are increased more often in post-crisis years than in other years. These increases can be observed especially in personal income tax, corporate tax, and VAT. “Countries that have raised taxes following crises have often seen their economic growth fall and income inequality rise,” Potrafke says. Lower growth rates were particularly seen following tax rate increases instituted in the wake of financial crises.
“Policymakers should consider that tax increases after crises can affect economic recovery,” Potrafke says. The study examined tax policies in 22 industrialized and emerging economies following 235 crises over the 1962–2014 period. Economic and financial crises as well as natural disasters were counted as crises. Tax-policy aspects included personal income tax, corporate tax, VAT, excise tax, wealth tax, and social security contributions.
