When forces act on an economy, either to increase its activity or to cause a retreat, it activates a series of automatic self-stabilizers for the purpose of returning it to its original level of activity. This study examines the effects of one of the most important stabilizers, the tax-burden stabilizer. The paper makes two important contributions to the research of the tax-burden stabilizer. First, it adds to the very limited literature an empirical evidence for the strengths of the tax-burden stabilizer in the short term relative to the long term and its ability to neutralize economic policy aiming to revive an economy. Second, it presents empirical evidence that an economic policy which takes into account the magnitude of the tax-burden stabilizer can neutralize most of its effects.

In economic literature, there is broad agreement on the importance of a stable, predictable environment for the socioeconomic welfare of both individuals and the economy as a whole, an environment with the lowest possible level of instability. In the short term, individuals prefer economic stability so that they can maintain stable consumption over time (see also Samuelson and Zeckhauser, 1988; and Kahneman, 2005). In the long term, economic fluctuations intensify uncertainty and, therefore, harm economies’ growth horizon.

Moreover, individuals’ psychological preferences do not remain in the realm of wishes but rather affect their behavior and the behavior of the economy generally. In particular, they affect the economy’s automatic stabilizers. Therefore, when exogenic or endogenic forces act on an economy, either to increase its activity or conversely to cause a retreat, the economy will activate a series of automatic self-stabilizers. The stabilizers will begin to operate before the full effect of the external forces finds expression. The purpose of the stabilizers is therefore to return the economy to its original level of activity, whether that level was high or low.

Against this background, taking into account the elasticities of the automatic stabilizers, and especially the tax-burden stabilizer, is an essential condition for the successful management of macroeconomic policy. This article will survey the various automatic stabilizers, empirically assess the elasticity of tax burden as a stabilizer and describe its meaning for managing macroeconomic policy in Israel.

The paper makes two important contributions to the research of the tax-burden stabilizer. First, it adds to the very limited literature an empirical evidence for the strengths of the tax-burden stabilizer in the short term relative to the long term and its ability to neutralize economic policy aiming to revive an economy. Second, it presents empirical evidence that an economic policy which takes into account the magnitude of the tax-burden stabilizer can neutralize most of its effect.

The paper is organized as follows: It discusses theoretically at length the various automatic stabilizers and their role in the economy. Subsequently, it addresses the empirical specifications, presents the formal hypotheses and discusses the results. Finally, it concludes and discusses the important policy implications which are obtained from the results.

Public Finance journal, Tax Buoyancy, Corporation Tax in Pre- and Post-Liberalization Periods, Economic Policy, Financial Reforms, Corporation Income Taxation, Economic Development, Gross Domestic Product, GDP, Linear Regression Equation, Augmented Dickey-Fuller, Vector Error Correction Mechanism, Domestic Companies, Corporate Development.