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Sectoral Effects of Tax Reforms in an Open Economy

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  • Olivier Cardi

    ()
    (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Romain Restout

    ()
    (Université Catholique de Louvain, IRES - UCL)

Abstract

We use a neoclassical open economy model with traded and non traded goods to investigate the sectoral effects of three tax reforms: i) two revenue-neutral shifting the tax burden from labor to consumption taxes and ii) one labor tax restructuring keeping the marginal tax wedge constant. Regardless of its type, a tax reform crowds-in both consumption and investment and raises employment. Whereas tax reforms have a small impact on GDP, they exert substantial effects on sectoral outputs which move in opposite direction in the short-run. The sensitivity analysis reveals that raising the elasticity of labor supply or reducing the tradable content in consumption expenditure amplifies the heterogeneity in sectoral output responses. Finally, allowing for the markup to depend on the number of competitors, we find that a substantial share of sectoral output variations can be attributed to the change in the markup triggered by firm entry.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00544475.

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Date of creation: 08 Dec 2010
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Handle: RePEc:hal:wpaper:hal-00544475

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Keywords: Non Traded Goods; Employment; Current Account; Tax Reform.;

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  1. Mankiw, N. Gregory & Weinzierl, Matthew, 2006. "Dynamic scoring: A back-of-the-envelope guide," Journal of Public Economics, Elsevier, Elsevier, vol. 90(8-9), pages 1415-1433, September.
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Cited by:
  1. Richard M. Bird & Michael Smart, 2012. "Financing Social Expenditures in Developing Countries: Payroll or Value Added Taxes?," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1206, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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