IDEAS home Printed from https://ideas.repec.org/p/hal/journl/halshs-00333597.html
   My bibliography  Save this paper

Tax Reform in Two-Sector General Equilibrium

Author

Listed:
  • Olivier Cardi

    () (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - UP2 - Université Panthéon-Assas - CNRS - Centre National de la Recherche Scientifique)

  • Romain Restout

    () (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

Abstract

We use a two-sector open economy model with an imperfectly competitive non traded sector to investigate the dynamic and steady-state effects of three tax reforms : [i] two revenue-neutral tax reforms shifting the tax burden from labor to consumption taxes and [ii] one labor tax reform keeping the marginal tax wedge constant. Regardless of its form, a tax restructuring crowds-in consumption and investment and raises employment. While tax multipliers for overall output are always positive, their size depends on the type of the tax reform and the financing scheme. Interestingly, the trade balance plays a key role in determining the relative size of sectoral tax multipliers : whereas the long-term tax multiplier is always slightly higher in the traded sector than in the non traded sector, this result is reversed in the short-term. Finally, time horizon matters in determining the relationships between both overall and sectoral tax multipliers and labor responsiveness.

Suggested Citation

  • Olivier Cardi & Romain Restout, 2008. "Tax Reform in Two-Sector General Equilibrium," Post-Print halshs-00333597, HAL.
  • Handle: RePEc:hal:journl:halshs-00333597
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00333597
    as

    Download full text from publisher

    File URL: https://halshs.archives-ouvertes.fr/halshs-00333597/document
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Turnovsky Stephen J. & Sen Partha, 1995. "Investment in a Two-Sector Dependent Economy," Journal of the Japanese and International Economies, Elsevier, vol. 9(1), pages 29-55, March.
    3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    4. Leeper, Eric M. & Yang, Shu-Chun Susan, 2008. "Dynamic scoring: Alternative financing schemes," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 159-182, February.
    5. Mankiw, N. Gregory & Weinzierl, Matthew, 2006. "Dynamic scoring: A back-of-the-envelope guide," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1415-1433, September.
    6. Mahbub Morshed, A. K. M. & Turnovsky, Stephen J., 2004. "Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy," Journal of International Economics, Elsevier, vol. 63(1), pages 147-177, May.
    7. Olivier Cardi, 2007. "The Zero-root Property: Permanent vs Temporary Terms-of-trade Shocks," Review of International Economics, Wiley Blackwell, vol. 15(4), pages 782-802, September.
    8. Richard Startz, 1989. "Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 737-752.
    9. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
    10. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
    11. Roeger, Werner, 1995. "Can Imperfect Competition Explain the Difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 316-330, April.
    12. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    13. Paul Cashin & C. John McDermott, 2003. "Intertemporal Substitution and Terms-of-Trade Shocks," Review of International Economics, Wiley Blackwell, vol. 11(4), pages 604-618, September.
    14. Lin, Shuanglin, 1999. "Tax reform and external balance," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 891-909, December.
    15. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2010. "La TVA sociale : bonne ou mauvaise idée ?," Economie & Prévision, La Documentation Française, vol. 0(2), pages 1-19.

    More about this item

    Keywords

    non traded goods; investment; employment; tax multiplier;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00333597. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.