The Effect of Loss Offset Provisions on the Asymmetric Behavior of Corporate Tax Revenues in the Business Cycle

This paper estimates the response of corporate tax revenues to the business cycle fluctuations and calculates a heterogeneous asymmetry in the tax revenue responses between booms and recessions using a new index of loss offset generosity provisions. I find strong short-run contemporaneous impact of business cycles on corporate tax revenues and a persistent asymmetric response of corporate tax revenues to booms and recession. Loss off set generosity provisions enhance this asymmetry. Countries with more generous loss offset provisions experience much more volatile response of corporate tax revenues to business cycles during recessions, magnifying the asymmetry of the cyclicality. As a result the automatic stabilizer impact of corporation tax will be stronger and more effective in recessions, especially in countries that offer more generous loss off set provisions