MEASURING THE GROWTH AND VARIABILITY OF TAX BASES OVER THE BUSINESS-CYCLE

The income elasticity of taxes is frequently used as an indicator of b oth short-run variability and long-run growth. This paper shows that t he standard method for estimating elasticities results in asymptotic b ias and inconsistent standard errors. Additionally, the standard estim ates only provide information about the long-run growth potential of t he tax. Thus, it is possible for a tax with a small estimated elastici ty to fluctuate highly over the business cycle. This paper uses time-s eries econometric techniques to provide unbiased estimates of the long -run growth potential(the long-run elasticity) and cyclical variabilit y (the short-run elasticity) of all major state tax bases.