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Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy

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  • Olivier Cardi
  • Romain Restout

Abstract

We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate the effects of unanticipated and anticipated tax reforms. First, an unanticipated tax reform produces an expansion of GDP, labor, and investment, while an anticipated tax reform has opposite effects before the implementation of the labor tax cut. Quantitatively, if the traded sector is more capital intensive, GDP increases by 1.6 percentage points or declines by 2.8 percentage points after three years, depending on whether the tax cut is unanticipated or anticipated. Second, we find that GDP change masks a wide dispersion in sectoral output responses. Importantly, in all scenarios, a tax reform substantially raises the relative size of the non-traded sector while traded output always drops. Allowing for the markup to depend on the number of competitors, we find that a significant share of GDP change can be attributed to the competition channel while the dispersion of sectoral output responses is amplified. Finally, the workers only benefit from the labor tax cut if the tax change is unanticipated and the traded sector is more capital intensive.

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Bibliographic Info

Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2012-01.

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Date of creation: 2012
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Handle: RePEc:ulp:sbbeta:2012-01

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Keywords: Non Traded Goods; Investment; Tax Reform; Anticipation effects.;

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Cited by:
  1. Raphaële Préget & Phu Nguyen-Van & Marc Willinger, 2012. "Who are the Voluntary Leaders? Experimental Evidence from a Sequential Contribution Game," Working Papers of BETA 2012-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Olivier Cardi & Romain Restout, 2012. "Fiscal shocks in a two sector open economy with endogenous markups," Working Papers of BETA 2012-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Julien Pénin, 2012. "Motivation crowding-out: Is there a risk for science?," Working Papers of BETA 2012-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  4. Amélie Barbier-Gauchard & Francesco De Palma & Giuseppe Diana, 2012. "Currency devaluation with dual labor market : Which perspectives for the Euro Zone ?," Working Papers of BETA 2012-04, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  5. Ragip Ege & Herrade Igersheim & Charlotte Le Chapelain, 2012. "Transcendental vs. Comparative Approaches to Justice : A Reappraisal of Sen’s Dichotomy," Working Papers of BETA 2012-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  6. Patrick Cohendet & Patrick Llerena & Laurent Simon, 2012. "THE ROUTINIZATION OF CREATIVITY: Lessons from the Case of a video-game Creative Powerhouse," Working Papers of BETA 2012-05, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  7. Olivier Cardi & Romain Restout, 2012. "Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy," Working Papers of BETA 2012-01, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  8. Meixing Dai, 2012. "Static and Dynamic Effects of Central Bank Transparency," Working Papers of BETA 2012-08, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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