Tax reform on the brink of fiscal dominance: a political economy model
AbstractWith an overindebted public-sector, Brazil has been on the brink of a fiscal dominance problem for quite a long time. The term has been usually associated to a situation in which monetary policy becomes subordinated to fiscal needs. This paper calls attention to broader implications of prolonged exposure to impending fiscal dominance. A highdebt environment may make perfectly reasonable fiscal-reform initiatives seem extremely risky. Without any room to absorb revenue losses, in a complex fiscalfederalism arrangement, the government is bound to recurrently see badly needed tax reform, which could lead to a much less distorting tax system, as an unaffordable adventure. The paper is structured in the following way. The next section presents stylized facts that have been underlying a whole decade of unsuccessful tax-reform attempts in Brazil. Section 3 shows how the combination of those facts creates very unfavorable conditions for the approval of the kind of tax reform the country needs. A simple political economy model is developed in section 4. Simulations based on the model are analyzed in sections 5 and 6. Concluding remarks are presented in the last section.
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Bibliographic InfoPaper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 505.
Date of creation: Aug 2005
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tax reform; public debt; fiscal dominance; political economy; federalism; Brazil;
Find related papers by JEL classification:
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H6 - Public Economics - - National Budget, Deficit, and Debt
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-05 (All new papers)
- NEP-MAC-2006-02-05 (Macroeconomics)
- NEP-PBE-2006-02-05 (Public Economics)
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