Olivera-Tanzi effect

The Olivera-Tanzi effect, occasionally called the "Olivera effect" or the "O-T effect", is an economic situation involving a period of high inflation in a country which results in a decline in the volume of tax collection and a slow deterioration of real tax proceeds being collected by the government of that country. The Individual Income Tax and Economic Growth by Vito Tanzi. Published 1969 Johns Hopkins University Press.]

Definition of the effect

The most simple definition of the Olivera-Tanzi effect is as follows. During any period of high inflation, governments upkeep costs for everything rises. However, since inflation hurts both trade and diminishes buying power of the consumer, business revenues fall. The actual real tax proceeds gathered by the government, after adjusting for inflation, will be less than in a period of normal inflation, due to both increased operating costs and decreased tax revenues from businesses.Transition, Taxation and the State by Gerald Turley. Published 2005 Ashgate Publishing, Ltd. ISBN 0754643689]

Importance of the effect

The primary importance of the O-T effect is the havoc it can wreak on unprepared economies that are hit suddenly with large amounts of inflation. This was common after WWI, when the first research was done. It became common again in the era of the World Bank and relief loans to Third World countries, who ended up taking on huge amounts of debt with no way to get out from under them while struggling with inflation. Macroeconomics Dimensions of Public Finance by Vito Tanzi. Published 1997 Routledge (UK). ISBN 0415141117]

Research

The effect has been known, informally and without much careful research, since the ending period after WWI, but two researchers (Julio Olivera [Olivera, Julio G. H., "Money, Prices and Fiscal Lags: A Note on the Dynamics of Inflation", Quarterly Review, vol. 20, Banca Nazionale del Lavoro, 1967, pp. 258-267] at the University of Buenos Aires, and Vito Tanzi [Tanzi, Vito, "Inflation, Lags in Collection, and the Real Value of Tax Revenue", Staff Papers, vol. 24, march 1977, IMF, 1977, pp. 154-167.] who was then involved with the Economic Reform Project of the Carnegie Endowment for International Peace) were the first ones to put a good deal of research into it and formulate a paper on the subject, later working with the Group of Thirty to refine it.Inflation stabilization with incomes policy support : a review of the experience in Argentina, Brazil, and Israel by Rudiger Dornbusch; Mário Henrique Simonsen; Group of Thirty. New York (227 Park Ave., New York 10172) : Group of Thirty, 1987. OCLC: 15607804]

Subsequent research has shown the O-T effect to be very wide ranging, but that its effects can be mitigated by proper macroeconomic measures taken to ensure a slow but steady decrease in inflation. Once inflation is reduced, the revenue will recover. Need to Design and Apply a More Effective Anti-Inflationary Plan in Latin America by Felipe Pazos. Journal of Interamerican Studies and World Affairs, Vol. 31, No. 1/2, Special Issue: Latin America at the Crossroads: Major Public Policy Issues (Spring - Summer, 1989), pp. 105-123]

References

ee also

*Inflation

External links

* [http://www.econ.puc-rio.br/gfranco/Ch7.PDF Detailed application of the Oliveira-Tanzi effect in action]