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Consumption Taxes and International Competitiveness in a Keynesian World

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  • Reto Schleiniger
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    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.

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    Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 042.

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    Handle: RePEc:zur:iewwpx:042

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    Keywords: Consumption tax reform; international competitiveness; Keynesian assumptions;

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    1. Grossman, Gene M., 1980. "Border tax adjustments: Do they distort trade?," Journal of International Economics, Elsevier, vol. 10(1), pages 117-128, February.
    2. 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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