Windfall revenues and structural balance in the Czech Republic

Abstract

ABSTRACTAnalysis of the structural balance is a crucial element for assessing the character of fiscal policy. However, this approach entails potential shortcomings, where some tax revenues may be affected by the development of variables other than the economic cycle. This can lead to skewed assessments of the fiscal effort because of the existence of windfall revenues/losses. We address this issue and identify windfall revenues in the Czech Republic. First, we calculate the elasticities of individual taxes on relevant macroeconomic variables. Then we test these variables for sensitivity to the economic cycle. The absence of such sensitivity suggests the possibility of windfall revenue. Further, we quantify the volume of the windfall revenue for 2007–2019. We found that the development of the rental market is the main factor influencing windfall revenue in the Czech Republic. The windfall revenue range is around 0.15% of GDP per year.KEYWORDS: Windfall revenuestax elasticitiesstructural balancefiscal effort AcknowledgmentsThe present paper was supported by the long-term institutional scientific research funding scheme in the Faculty of Finance and Accounting, Prague University of Economics and Business (IP 100040).Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1. A typical example is the MTO (Medium Term Objective) rule in the EU. If a member state does not reach the MTO value, it must show a fiscal effort of at least 0.5% of GDP per year.2. A detailed description of the estimation methodology is available at https://www.mfcr.cz/cs/legislativa/metodiky/2020/metodika-odvozeni-vydajovych-ramcu-statn-39442/. The results, including the data used, are available at https://www.mfcr.cz/cs/verejny-sektor/makroekonomika/makroekonomicka-predikce/2022/makroekonomicka-predikce-listopad-2022–492723. Income from the sale of real estate is exempt in the case of holding by the taxpayer for more than ten years; until 2020, the time test was five years. If the real estate is used for the living of the taxpayer or the living of his family members, the time test for exemption of the income is two years. The time test can be even shorter if the money received from selling the real estate is used for the own living of the taxpayer or his family again. The closeness of the relationship of the family members is specified within the law. If taxable, the purchase price can be considered as a taxable expense up to the amount of taxable income, similar to selling shares.Additional informationFundingThe work was supported by the Prague University of Economics and Business.