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Tax Reform in Two-Sector General Equilibrium

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Author Info

  • Olivier Cardi

    ()
    (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II)

  • Romain Restout

    ()
    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

Abstract

We use a two-sector open economy model with an imperfectly competitive non traded sector to investigate the dynamic and steady-state effects of three tax reforms : [i] two revenue-neutral tax reforms shifting the tax burden from labor to consumption taxes and [ii] one labor tax reform keeping the marginal tax wedge constant. Regardless of its form, a tax restructuring crowds-in consumption and investment and raises employment. While tax multipliers for overall output are always positive, their size depends on the type of the tax reform and the financing scheme. Interestingly, the trade balance plays a key role in determining the relative size of sectoral tax multipliers : whereas the long-term tax multiplier is always slightly higher in the traded sector than in the non traded sector, this result is reversed in the short-term. Finally, time horizon matters in determining the relationships between both overall and sectoral tax multipliers and labor responsiveness.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00333597.

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Date of creation: 2008
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Handle: RePEc:hal:journl:halshs-00333597

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Keywords: non traded goods ; investment ; employment ; tax multiplier;

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Cited by:
  1. Fève, P. & Matheron, J. & Sahuc, J-G., 2009. "La TVA sociale : bonne ou mauvaise idée ?," Working papers 244, Banque de France.

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