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Dynamic Laffer curves, population growth and public debt overhangs

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  • Tsuchiya, Yoichi

Abstract

This paper extends the Ireland (1994) model to incorporate population growth and examines a dynamic effect of a tax reduction on a long-run government budget. We find evidence suggesting that the dynamic effect of a tax cut improves the government budget situation in the long-run. Our numerical analysis suggests that a population growth rate consistent with the U.S. economy has positive effects on a long-run government budget. It is likely that low population growth leads to the deterioration of a long-run government budget. However, dynamic Laffer curves fail to arise incorporating a moderate initial debt level into the model. Furthermore, a public debt overhangs experiment casts doubt on the dynamic Laffer curves.

Suggested Citation

  • Tsuchiya, Yoichi, 2016. "Dynamic Laffer curves, population growth and public debt overhangs," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 40-52.
  • Handle: RePEc:eee:reveco:v:41:y:2016:i:c:p:40-52 DOI: 10.1016/j.iref.2015.10.001
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    More about this item

    Keywords

    Dynamic Laffer curve; Dynamic scoring; Taxation; Population; Debt management;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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