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Taxation, Growth and Welfare: Dynamic Effects of Estonia´s 2000 Income Tax Act

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  • Michael Funke

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  • Holger Strulik

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Abstract

This paper analyses the long-run effects of Estonia’s 2000 Income Tax Act with a dynamic general equilibrium model. Specifically, we consider the impact of the shift from an imputation system to one where companies only pay taxes on distributed profits. Balanced growth paths, transitional dynamics and welfare costs are computed. Our results indicate that the 2000 Income Tax Act leads to higher per capita income and investment, but lower welfare. A sensitivity analysis shows that the results are rather robust.

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Bibliographic Info

Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 20611.

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Date of creation: Nov 2006
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Handle: RePEc:ham:qmwops:20611

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  1. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
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  4. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
  5. Kenneth L. Judd, 1984. "The Welfare Cost of Factor Taxation in a Perfect Foresight Model," Discussion Papers 643, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Liam P. Ebrill, 1999. "Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 182, International Monetary Fund.
  7. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  8. Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
  9. Ortigueira, Salvador, 1998. "Fiscal policy in an endogenous growth model with human capital accumulation," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 323-355, July.
  10. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  11. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc.
  12. Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 468-96, June.
  13. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  14. Strulik, Holger, 2003. "Capital tax reform, corporate finance, and economic growth and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 595-615, December.
  15. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  16. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
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Cited by:
  1. Azacis, Helmuts & Gillman, Max, 2010. "Flat tax reform: The Baltics 2000-2007," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 692-708, June.
  2. Thorvaldur Gylfason & Eduard Hochreiter, 2007. "Growing Apart? A Tale of Two Republics: Estonia and Georgia," CESifo Working Paper Series 2155, CESifo Group Munich.
  3. Luigi, Bernardi & Mar, Chandler, 2004. "Main tax policy issues in the new members of Eu," MPRA Paper 18195, University Library of Munich, Germany.
  4. Aaro Hazak, 2007. "Companies’ Financial Decisions under the Distributed Profit Taxation Regime of Estonia," Working Papers 155, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  5. Anne Lauringson, 2011. "Unemployment Benefits In A Period Of Crisis: The Effect On Unemployment Duration," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 82, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  6. Aaro Hazak, 2006. "Dividend Decision under Distributed Profit Taxation: Investor’s Perspective," Working Papers 145, Tallinn School of Economics and Business Administration, Tallinn University of Technology.

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