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International Effects of Tax Reforms

  • Frenkel, Jacob A
  • Razin, Assaf

In an open economy with international capital flows, there is an equivalence relation between income tax, consumption tax, international borrowing tax, and an external interest earning tax. This paper analyzes tax reform involving shifts between income and consumption taxes in this setting. It is shown that the real effects of such revenue-neutral tax reform depend critically on the country's current account position and the nature of the reform. In particular, whether the world interest rate rises or falls as a consequence of a budget deficit depends on the tax system in force. The analysis provides a clear rationale for the international coordination of tax policies. Copyright 1989 by Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 99 (1989)
Issue (Month): 395 (Supplement)
Pages: 38-58

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Handle: RePEc:ecj:econjl:v:99:y:1989:i:395:p:38-58
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  1. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Working Papers 0729, National Bureau of Economic Research, Inc.
  2. Brock, William A & Turnovsky, Stephen J, 1981. "The Analysis of Macroeconomic Policies in Perfect Foresight Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(1), pages 179-209, February.
  3. Judd, Kenneth L, 1987. "A Dynamic Theory of Factor Taxation," American Economic Review, American Economic Association, vol. 77(2), pages 42-48, May.
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