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TAXES, GROWTH AND THE CURRENT ACCOUNT TICK‐CURVE EFFECT
Author(s) -
DAY CREINA,
DAY GARTH
Publication year - 2010
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/j.1467-8454.2010.00384.x
Subject(s) - economics , current account , small open economy , consumption (sociology) , convergence (economics) , macroeconomics , position (finance) , growth model , monetary economics , monetary policy , social science , finance , sociology , exchange rate
This paper examines the dynamic and long run effects of a shift from income taxes to consumption taxes in a growing small open economy. We introduce a government sector that maintains a balanced budget and expenditure at a constant proportion of domestic income to a small open economy Swan‐Solow model. Our framework provides a previously unidentified dynamic effect that is robust to endogenising the savings rate. Lowering the income tax rate promotes economic growth and has a tick‐curve effect on the current account balance, characterised by instantaneous deterioration, a period of recovery and gradual convergence to an improved position in the long run.