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Consumption Taxes and International Competitiveness in a Keynesian World

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  • Reto Schleiniger

Abstract

The present paper analyzes the consequences of a consumption tax reform for the export sector. In particular, it offers an explanation why exporters support such a reform although economic theory basically predicts trade neutrality. To this purpose, the basic neoclassical model is replaced with two Keynesian assumptions, i.e. sticky wages and absence of perfect foresight. It is derived that in both cases the export sector expands in the short run. However, with sticky wages, this is only possible if, at the same time, the central bank fixes the exchange rate. In the absence of perfect foresight, on the other hand, the additional condition for the tax reform to increase exports is that the government balances its budget in each period.

Suggested Citation

  • Reto Schleiniger, "undated". "Consumption Taxes and International Competitiveness in a Keynesian World," IEW - Working Papers 042, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:042
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    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp042.pdf
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    References listed on IDEAS

    as
    1. Martin S. Feldstein & Paul R. Krugman, 1990. "International Trade Effects of Value-Added Taxation," NBER Chapters, in: Taxation in the Global Economy, pages 263-282, National Bureau of Economic Research, Inc.
    2. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
    3. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
    4. Trostel, Philip A., 1993. "The nonequivalence between deficits and distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 207-227, April.
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    More about this item

    Keywords

    Consumption tax reform; international competitiveness; Keynesian assumptions;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • F10 - International Economics - - Trade - - - General
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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