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Taxation, Growth and Welfare: Dynamic Effects of Estonia's 2000 Income Tax Act

  • Michael Funke

    ()

    (Department of Economics, Hamburg University, Germany)

  • Holger Strulik

    ()

    (Department of Economics, Hannover University, Germany)

This paper analyses the long-run effects of Estonia’s 2000 Income Tax Act with a dynamic general equilibrium model. Specifically, we consider the impact of the shift from an imputation system to one where companies only pay taxes on distributed profits. Balanced growth paths, transitional dynamics and welfare costs are computed. Our results indicate that the 2000 Income Tax Act leads to higher per capita income and investment, but lower welfare. A sensitivity analysis shows that the results are rather robust.

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File URL: http://www.taloustieteellinenyhdistys.fi/images/stories/fep/fep12006_funke.pdf
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Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 19 (2006)
Issue (Month): 1 (Spring)
Pages: 25-38

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Handle: RePEc:fep:journl:v:19:y:2006:i:1:p:25-38
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  1. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  2. Kenneth L. Judd, 1984. "The Welfare Cost of Factor Taxation in a Perfect Foresight Model," Discussion Papers 643, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  8. Liam P. Ebrill, 1999. "Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 182, International Monetary Fund.
  9. Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 468-96, June.
  10. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
  11. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc.
  12. Ortigueira, Salvador, 1998. "Fiscal policy in an endogenous growth model with human capital accumulation," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 323-355, July.
  13. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
  14. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  15. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  16. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  17. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  18. Brunner, Martin & Strulik, Holger, 2002. "Solution of perfect foresight saddlepoint problems: a simple method and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 737-753, May.
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