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Government Budget, Public-Sector Wages, and Corporate Taxes in a Small Open Economy

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  • Chao, Chi-Chur
  • Yu, Eden S.H.
  • Yu, Wusheng

Abstract

This paper examines the welfare implications of adjustments in public sector wages and capital tax rates for a small open economy in a general equilibrium setting. The individually and jointly optimal wage and tax policies are derived and interpreted using a simple general equilibrium model. It is found that facing reductions in land sales, falls in foreign interest rates or deteriorations in the terms of trade, a cut in public workers’ pay is needed for making their wage comparable to the private sector and a hike in capital taxes is recommended for budgetary considerations. The empirical part of the paper develops a computable general equilibrium model for Hong Kong. Together with a data set for Hong Kong, this model is used to numerically evaluate the various optimal policies. The numerical results not only confirm the main preposition of the paper, they also provide preliminary quantitative estimates of the various optimal policy variables.

Suggested Citation

  • Chao, Chi-Chur & Yu, Eden S.H. & Yu, Wusheng, 2009. "Government Budget, Public-Sector Wages, and Corporate Taxes in a Small Open Economy," Conference papers 331917, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331917
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    References listed on IDEAS

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    Public Economics; Labor and Human Capital;

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