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Strategies for Fiscal Reform in the Context of the EMU: the Case of Portugal
Author(s) -
Pereira Alfredo M.,
Rodrigues Pedro G.
Publication year - 2004
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2004.00225.x
Subject(s) - economics , context (archaeology) , welfare , stability and growth pact , tax reform , endogenous growth theory , social security , public finance , general equilibrium theory , overlapping generations model , investment (military) , macroeconomics , monetary economics , public economics , international economics , market economy , european union , politics , member states , paleontology , political science , law , biology , human capital
The authors use an endogenous growth dynamic general‐equilibrium model, which accommodates the institutional constraints of the Stability and Growth Pact, to study tax reform in Portugal. Simulation results suggest that tax cuts financed in a nondistortionary way increase long‐term GDP; i.e., they are efficiency improving, but do not always increase welfare. The tradeoff between efficiency and welfare is alleviated when reductions in public spending or increased public indebtedness finance the tax cuts. Since these mechanisms are not realistic under the institutional setting of the Stability and Growth Pact, tax reform in Portugal must involve trading off distortionary tax margins. In this case, the best strategy to increase both efficiency and welfare is to increase investment tax credits and finance them either through personal income taxes or through employers’ social security contributions.