ABSTRACT
The financial crisis has revived discussion about the role of the state in smoothing business cycle fluctuations and passive fiscal policy instruments’ effectiveness. The role of automatic stabilisers, and their advantages in terms of being timely, targeted, and temporary, has been widely discussed at this time. On one side of this discussion there is a view that using discretionary fiscal policy may lead to booster fluctuations of general demand because of long and unpredictable delay between the start of recession and results of changes in fiscal policy. On the other side of the discussion there is a view that the severity and range of the crisis meant that using automatic stabilisers should be strengthened by discretionary fiscal policy. Several empirical studies test either the hypothesis that large governments are better able to withhold output fluctuations or they assess the sensitivity of government expenditures or revenues to the business cycle. However, a largely absent piece in the literature is the direct relationship between tax progressivity and output volatility. The aim of this chapter has been to examine the impact of personal income tax and social security contributions in stabilising the economy in Poland in 2000–2008 and 2009–15, and also to investigate empirically the effect of personal income tax progressivity on output volatility.
