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A TALE OF TAX POLICIES IN OPEN ECONOMIES
Author(s) -
Auray Stéphane,
Eyquem Aurélien,
Gomme Paul
Publication year - 2016
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12199
Subject(s) - economics , consumption tax , state income tax , value added tax , monetary economics , tax reform , small open economy , indirect tax , consumption (sociology) , welfare , ad valorem tax , open economy , labour economics , macroeconomics , public economics , market economy , exchange rate , social science , sociology
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.