Automatic Stabilizers Under Flat and Progressive Taxation: Fiscal Responses and Output Volatility in Central and Eastern Europe, 1995–2024

Automatic stabilizers dampen macroeconomic fluctuations without legislative action, but whether flat or progressive personal income tax (PIT) schedules stabilize more strongly over the business cycle remains open. We examine real gross domestic product (GDP) growth volatility in 11 Central and Eastern European economies over 1995–2024, combining rolling-window volatility measures, two-way fixed-effects regressions and direct estimates of the cyclical responsiveness of fiscal balances, revenue and expenditure ratios. Unconditionally, five-year output volatility is 1.16 percentage points higher under flat PIT regimes, but the difference does not survive country and year fixed effects and lagged covariates. Interacted with the 2008–2010 global financial crisis the differential widens by 2.42 percentage points, an effect that rests on the three Baltic economies, whereas the COVID-19 interaction is indistinguishable from zero. A one-percentage-point rise in real GDP growth improves the fiscal balance by 0.265 percentage points of GDP under progressive regimes and by 0.242 under flat regimes, a difference that is not significant. In levels, a weaker revenue response under flat regimes is largely offset by a stronger expenditure response. The results do not support a simple ranking: stabilization capacity depends on the whole tax–benefit system, fiscal institutions and the nature of the shock.