Baltic Tax Reform

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Baltic Tax Reform

Author Info

Azacis, Helmuts () (Cardiff Business School)
Gillman, Max () (Cardiff Business School)

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Abstract

The paper presents an endogenous growth economy with a representation of the tax rate system in the Baltic countries. Assuming that government spending is a given fraction of output, the paper shows how a flat tax system balanced between labor and corporate tax rates can be second best optimal. It then computes how actual Baltic tax reforms from 2000 to 2007 affect the growth rate and welfare, including transition dynamics. Comparing the actual reform effects to hypothetical tax experiments, it results that equal flat tax rates on personal and corporate income would have increased welfare in all three Baltic countries by 24% more on average than the actual reforms. This shows how equal, balanced, flat rate taxes can be optimal in both theory and practice. Further, movement towards a more equal balance between labor and capital tax rates, through changing just one tax rate, achieved almost as high or higher utility gains as in actual law for all three countries under both open and closed economy cases. This shows benefits of moving towards the optimum.

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Publisher Info
Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/6.

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Length: 52 pages
Date of creation: Feb 2008
Date of revision: Oct 2008
Publication status: Forthcoming in Journal of Macroeconomics
Handle: RePEc:cdf:wpaper:2008/6

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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-03-01 (All new papers)
NEP-MAC-2008-03-01 (Macroeconomics)
NEP-PBE-2008-03-01 (Public Economics)
NEP-TRA-2008-03-01 (Transition Economics)

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