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Ramsey income taxation in a small open economy with trade in capital goods

Author

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  • Tang Jenn-Hong

    (Department of Economics, National Tsing-Hua University, 101, Sec.2, Kuang-Fu Rd., Hsin-Chu 30013, Taiwan, Phone: +886-3-5162149)

Abstract

In this paper, the optimal taxation problem in a small open economy with international trade in capital or investment goods is investigated. The monopolistic power of a small open economy over the terms of trade causes distortions in consumption and investment. The results suggest that due to the external distortion in investment, the long-run optimal capital income tax could be positive under the baseline calibration, and it is increasing in the degree of investment openness and decreasing in the elasticity of substitution between domestic and foreign goods. The long-run optimal labor income tax exhibits the opposite relationships with the openness and elasticity parameters. During the course of business cycles, the fluctuations in the external distortions cause the optimal labor income tax to be more volatile and the optimal capital income tax to be less volatile than their closed-economy counterparts.

Suggested Citation

  • Tang Jenn-Hong, 2020. "Ramsey income taxation in a small open economy with trade in capital goods," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-48, January.
    • Handle: RePEc:bpj:bejmac:v:20:y:2020:i:1:p:48:n:7
    DOI: 10.1515/bejm-2017-0044
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    References listed on IDEAS

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    More about this item

    Keywords

    fiscal policy; optimal policy; small open economy;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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