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Welfare Effects of Tax Policy in Open Economies: Stabilization and Cooperation

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  • Sunghyun H. Kim
  • Jinill Kim

Abstract

This paper studies an international tax policy design problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfare-improving active tax policies, in particular capital and labor income tax, under the non-cooperative Nash equilibrium and the cooperative equilibrium. Unlike the conventional wisdom regarding stabilization policies, optimal tax policies in our economy are procyclical. Relative to the non-cooperative setting, international tax policy cooperation requires more active tax policies (about two times) and generates large extra welfare gains (by about a th

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 399.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:399

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Keywords: income tax; welfare; stabilization; cooperation;

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