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Supply-Side Economics in a Global Economy

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Author Info
Enrique G. Mendoza
Linda L. Tesar

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Abstract

Recent quantitative studies predict large welfare gains from reducing tax distortions in a closed economy, despite costly transitional dynamics to more efficient tax systems. This paper examines transitional dynamics and gains of tax reforms for countries in a global economy, and provides numerical solutions for international tax competition games. Tax reforms in a global economy cause cross-country externalities through capital flows in response to consumption-smoothing and debt-servicing effects, with taxes on world payments affecting the distribution of welfare gains. Within the class of time-invariant tax rates, the gains of replacing income taxes with consumption taxes are large and, in the absence of taxes on foreign assets, the monopoly distortion separating cooperative and noncooperative equilibria is negligible. The analysis starts from a benchmark reflecting current G-7 fiscal policies, and considers the effects of tax reforms on real exchange rates and interest differentials. Tax-distorted equilibrium dynamics are computed using a modified version of the King-Plosser-Rebelo algorithm augmented with shooting routines.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5086.

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Date of creation: Apr 1995
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Handle: RePEc:nbr:nberwo:5086

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Cooley, Thomas F. & Hansen, Gary D., 1992. "Tax distortions in a neoclassical monetary economy," Journal of Economic Theory, Elsevier, vol. 58(2), pages 290-316, December. [Downloadable!] (restricted)
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  3. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June. [Downloadable!] (restricted)
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  4. Gian Maria Milesi-Ferretti & Nouriel Roubini, 1994. "Taxation and Endogenous Growth in Open Economies," IMF Working Papers 94/77, International Monetary Fund.
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  5. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March. [Downloadable!] (restricted)
  6. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May. [Downloadable!] (restricted)
  7. George Kopits, 1992. "Tax harmonization in the European Community: Policy Issues and Analysis," IMF Occasional Papers 94, International Monetary Fund.
  8. Bernheim, B Douglas, 1981. "A Note on Dynamic Tax Incidence," The Quarterly Journal of Economics, MIT Press, vol. 96(4), pages 705-23, November. [Downloadable!] (restricted)
  9. David Backus & Michael Devereux & Douglas Purvis, 1986. "A Positive Theory of Fiscal Policy in Open Economies," Working Papers 638, Queen's University, Department of Economics.
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  10. 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. [Downloadable!] (restricted)
  11. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104. [Downloadable!] (restricted)
  12. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier. [Downloadable!] (restricted)
  13. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany. [Downloadable!]
  14. V.V. Chari & Patrick J. Kehoe, 1989. "International coordination of fiscal policy in limiting economies," Staff Report 121, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  15. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August. [Downloadable!] (restricted)
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  16. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September. [Downloadable!] (restricted)
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  17. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December. [Downloadable!] (restricted)
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  18. Sibert, Anne, 1990. "Taxing capital in a large, open economy," Journal of Public Economics, Elsevier, vol. 41(3), pages 297-317, April. [Downloadable!] (restricted)
  19. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August. [Downloadable!] (restricted)
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  20. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93. [Downloadable!] (restricted)
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  21. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September. [Downloadable!] (restricted)
  22. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland. [Downloadable!]
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  23. 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. [Downloadable!] (restricted)
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  24. Kehoe, Patrick J., 1987. "Coordination of fiscal policies in a world economy," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 349-376, May. [Downloadable!] (restricted)
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  25. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787.
  26. 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. [Downloadable!] (restricted)
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  27. Lipton, David & Sachs, Jeffrey, 1983. "Accumulation and growth in a two-country model : A simulation approach," Journal of International Economics, Elsevier, vol. 15(1-2), pages 135-159, August. [Downloadable!] (restricted)
  28. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [Downloadable!] (restricted)
  29. Hamada, Koichi, 1976. "A Strategic Analysis of Monetary Interdependence," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 677-700, August. [Downloadable!] (restricted)
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