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Fiscal Reform, Growth and Current Account Dynamics

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  • Creina Day

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  • Garth Day

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Abstract

This paper examines the dynamic and long run effects of a shift from income taxes to consumption taxes in a growing small open economy. We extend the small open economy Solow-Swan model by introducing a government sector that maintains both a balanced budget and expenditure at a constant proportion of domestic income. Switching to lower income taxes promotes economic growth and improves the current account balance, despite an instantaneous drop.

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Bibliographic Info

Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2007-485.

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Length: 19 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:acb:cbeeco:2007-485

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  1. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  2. Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series, European Central Bank 0168, European Central Bank.
  3. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 485-517, June.
  4. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes.
  5. Leung, Charles Ka Yui, 1999. "Income Tax, Property Tax, and Tariff in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 7(3), pages 541-54, August.
  6. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
  7. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S126-50, October.
  8. Jinli Zeng & Jie Zhang, 2001. "Long-run growth effects of taxation in a non-scale growth model with innovation," Departmental Working Papers, National University of Singapore, Department of Economics wp0104, National University of Singapore, Department of Economics.
  9. Schubert, Stefan F & Turnovsky, Stephen J, 2002. "The Dynamics of Temporary Policies in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 604-22, November.
  10. Turnovsky, Stephen J., 1996. "Fiscal policy, growth, and macroeconomic performance in a small open economy," Journal of International Economics, Elsevier, Elsevier, vol. 40(1-2), pages 41-66, February.
  11. Matt Benge & Graeme Wells, 2002. "Growth and the Current Account in a Small Open Economy," The Journal of Economic Education, Taylor & Francis Journals, Taylor & Francis Journals, vol. 33(2), pages 152-165, June.
  12. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 90-09, Department of Economics at the University of Washington.
  13. Kookshin Ahn, 2003. "Are East Asian Economies Dynamically Efficient?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 28(1), pages 101-110, June.
  14. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(3), pages 519-50, June.
  15. Manuel Gomez, 2003. "Effects of Flat-Rate Taxes: to What Extent Does the Leisure Specification Matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 404-430, April.
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