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Fiscal Policy Reforms and Dynamic Laffer Effects

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  • Oudheusden, P. van

    (Tilburg University, Center for Economic Research)

Abstract

We examine the impact of fiscal policy reforms on the long-run government budget balance in a one-sector model of endogenous growth with factor income taxes, a tax on consumption, non-productive public goods expenditures, and a labour-leisure trade-off. In addition, we allow for different structures of government expenditures and public debt. We analytically show that, when performing a dynamic Laffer effect analysis, there exists a set of conditions that hold for a number of endogenous growth models. We find that for the euro area an improvement in the long-run government budget balance is always obtained for a lower tax rate on capital income but is only obtained for a substantial lower tax rate on labour income. Moreover, we show that when lower taxes on factor income are financed by higher taxes on consumption, there exists a wide array of combinations for which there is an improvement in both the long-run government budget balance and lifetime welfare. These combinations, however, differ in their implications for labour supply and immediate welfare effects.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-15.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201015

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Web page: http://center.uvt.nl

Related research

Keywords: Dynamic Scoring; Laffer Effect; Factor Income Taxation; Endogenous Growth;

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