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The Interaction of Direct and Indirect Taxes: The Prospects of Fiscal Devaluation

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  • Michael Stimmelmayr

Abstract

In this paper we derive the theoretical underpinning of fiscal devaluation (i.e. the reduction of direct taxes combined with a (revenue-neutral) increase in indirect taxes in order to mimic the real outcome of a nominal exchange rate devaluation.) in the framework of a neoclassical growth model. In addition, we calibrate the model to the German economy and quantify the effects associated with the fiscal devaluation carried out in Germany since 2005.A computable general equilibrium growth model calibrated to the German economy. The model accounts for endogenous production and labour supply as well as international trade.The simulation results show that due to the reform a significant amount of revenues were raised without generating a negative effect on economic growth. Further, the reform lead to a significant improvement of the trade balance (by around 3.1 percentage points in the short-run) thereby confirming the theoretical considerations associated with fiscal devaluation.

Suggested Citation

  • Michael Stimmelmayr, 2015. "The Interaction of Direct and Indirect Taxes: The Prospects of Fiscal Devaluation," EcoMod2015 8629, EcoMod.
    • Handle: RePEc:ekd:008007:8629
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    References listed on IDEAS

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    1. Stimmelmayr, Michael, 2007. "Fundamental Capital Income Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 23, number urn:isbn:9783161492617.
    2. von Thadden, Leopold & Lipińska, Anna, 2009. "Monetary and fiscal policy aspects of indirect tax changes in a monetary union," Working Paper Series 1097, European Central Bank.
    3. Radulescu, Doina & Stimmelmayr, Michael, 2010. "The impact of the 2008 German corporate tax reform: A dynamic CGE analysis," Economic Modelling, Elsevier, vol. 27(1), pages 454-467, January.
    4. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, 2014. "Fiscal Devaluations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 725-760.
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