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Welfare effects of tax policy in open economies: stabilization and cooperation

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  • Jinill Kim
  • Sunghyun Henry 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 third).

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-51.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-51

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Keywords: Welfare ; Income tax;

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  1. Hairault, Jean-Olivier & Langot, Francois & Portier, Franck, 2001. "Efficiency and stabilization: reducing Harberger triangles and Okun gaps," Economics Letters, Elsevier, vol. 70(2), pages 209-214, February.
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  15. Kim, Sunghyun Henry & Kose, M. Ayhan, 2003. "Dynamics Of Open-Economy Business-Cycle Models: Role Of The Discount Factor," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 263-290, April.
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