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Baltic Tax Reform

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Abstract

The paper presents an endogenous growth economy with a representation of the tax rate system in the Baltic countries. Assuming that government spending is a given fraction of output, the paper shows how a flat tax system balanced between labor and corporate tax rates can be second best optimal. It then computes how actual Baltic tax reforms from 2000 to 2007 affect the growth rate and welfare, including transition dynamics. Comparing the actual reform effects to hypothetical tax experiments, it results that equal flat tax rates on personal and corporate income would have increased welfare in all three Baltic countries by 24% more on average than the actual reforms. This shows how equal, balanced, flat rate taxes can be optimal in both theory and practice. Further, movement towards a more equal balance between labor and capital tax rates, through changing just one tax rate, achieved almost as high or higher utility gains as in actual law for all three countries under both open and closed economy cases. This shows benefits of moving towards the optimum.

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  • Azacis, Helmuts & Gillman, Max, 2008. "Baltic Tax Reform," Cardiff Economics Working Papers E2008/6, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2008.
  • Handle: RePEc:cdf:wpaper:2008/6
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    1. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-550, June.
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    Cited by:

    1. Vasilev, Aleksandar, 2015. "Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria's 2008 flat tax reform," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 169-185.
    2. Norbert Švarda, 2015. "The End of the Flat Tax Experiment in Slovakia," Discussion Papers 33, Central European Labour Studies Institute (CELSI).
    3. Di Nola, Alessandro & Kocharkov, Georgi & Vasilev, Aleksandar, 2016. "Productivity, Taxation and Evasion: A Quantitative Exploration of the Determinants of the Informal Economy," EconStor Preprints 144164, ZBW - German National Library of Economics.
    4. Anne Lauringson, 2011. "Unemployment Benefits In A Period Of Crisis: The Effect On Unemployment Duration," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 82, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    5. Jaan Masso & Jaanika Merikull & Priit Vahter, 2011. "Gross profit taxation versus distributed profit taxation and firm perfomance : effects of Estonia,s corporate income tax reform," Bank of Estonia Working Papers wp2011-02, Bank of Estonia, revised 27 Apr 2011.
    6. Aleksandar Vasilev, 2016. "Progressive taxation and (in)stability in an endogenous growth model with human capital accumulation," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 59(2), pages 1-15.
    7. Vasilev, Aleksandar, 2015. "The welfare effect of flat income tax reform: the case of Bulgaria," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 205-220.
    8. Jaan Masso & K. Espenberg & Anu Masso & I. Mierina & Kaia Philips, 2013. "GINI Country Report: Growing Inequalities and their Impacts in the Baltic States Estonia, Latvia, Lithuania," GINI Country Reports baltics, AIAS, Amsterdam Institute for Advanced Labour Studies.
    9. Vasilev, Aleksandar, 2016. "Progressive taxation and (in)stability in an endogenous growth model with human capital accumulation: the case of Bulgaria," EconStor Preprints 144212, ZBW - German National Library of Economics.

    More about this item

    Keywords

    tax reforms; endogenous growth; transitional dynamics; flat taxes;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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