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A Tale Of Tax Policies In Open Economies

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  • Stéphane Auray
  • Aurélien Eyquem
  • Paul Gomme

Abstract

To evaluate fiscal policy reforms for Euro‐area countries, this article develops and calibrates a small open economy model. Debt reduction reforms require higher tax rates in the short term in exchange for lower rates in the long term as the debt‐servicing burden falls. Using the capital income tax to implement such a policy leads to welfare gains; the consumption tax, a very small welfare gain; and the labor income tax, a welfare loss. Holding fixed the long‐run debt–output ratio, offsetting a lower capital income tax with either a higher labor income or consumption tax generally yields welfare gains.

Suggested Citation

  • Stéphane Auray & Aurélien Eyquem & Paul Gomme, 2016. "A Tale Of Tax Policies In Open Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(4), pages 1299-1333, November.
  • Handle: RePEc:wly:iecrev:v:57:y:2016:i:4:p:1299-1333
    DOI: 10.1111/iere.12199
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    Cited by:

    1. Auray, Stéphane & Eyquem, Aurélien & Gomme, Paul, 2019. "Debt hangover in the aftermath of the Great Recession," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 107-133.
    2. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    3. Paul Gomme, 2020. "Labor Market and Fiscal Policy During and After the Coronavirus," Cahiers de recherche 12-2020, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    4. Enrique G. Mendoza & Linda L. Tesar & Jing Zhang, 2014. "Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies," Working Paper Series WP-2014-13, Federal Reserve Bank of Chicago.
    5. Auray, Stéphane & Eyquem, Aurélien & Gomme, Paul, 2018. "Ramsey-optimal tax reforms and real exchange rate dynamics," Journal of International Economics, Elsevier, vol. 115(C), pages 159-169.
    6. Alba, Carlos & McKnight, Stephen, 2022. "Laffer curves in emerging market economies: The role of informality," Journal of Macroeconomics, Elsevier, vol. 72(C).
    7. Auray, Stéphane & Eyquem, Aurélien, 2019. "Episodes of war and peace in an estimated open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 203-249.
    8. Kotamäki Mauri, 2017. "Laffer Curves and Home Production," Nordic Tax Journal, Sciendo, vol. 2017(1), pages 59-69, January.
    9. Alejandro Cunat & Szabolcs Deak & Marco Maffezzoli, 2022. "Tax Cuts in Open Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 83-108, July.
    10. repec:prs:ecstat:estat_0336-1454_2017_num_494_1_10782 is not listed on IDEAS
    11. Jocelyn Boussard & Benoît Campagne, 2017. "Fiscal policy coordination in a monetary union at the zero lower bound," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 494-495-4, pages 65-90.
    12. Jing Zhang, 2015. "Saving Europe?," 2015 Meeting Papers 599, Society for Economic Dynamics.
    13. Paul Gomme, 2022. "US Fiscal policy during and after the coronavirus," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(S1), pages 358-378, February.
    14. Cubizol, Damien, 2020. "Rebalancing in China: A taxation approach," China Economic Review, Elsevier, vol. 60(C).
    15. Chen, Xiaoshan & Leith, Campbell & Ricci, Mattia, 2023. "Evaluating fiscal policy reforms using the fiscal frontier," Journal of Economic Dynamics and Control, Elsevier, vol. 155(C).
    16. Damien Cubizol, 2017. "Rebalancing in China: a taxation approach," Working Papers 1732, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    17. Paul Gomme & Damba Lkhagvasuren, 2013. "Calibration and simulation of DSGE models," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 24, pages 575-592, Edward Elgar Publishing.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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