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EnglishA reduction in income tax rates generates substantial dynamic responses within the frame- work of the standard neoclassical growth model. The short-run revenue loss after an in- come tax cut is partly -- or, depending on parameter values, even completely -- offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implica- tions of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate that international trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenue in steady state.
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| Titolo: | Tax cuts in open economies |
| Data di pubblicazione: | 2008 |
| Autori: | |
| Autori: | Cunat, A; Deak, S; Maffezzoli, Marco |
| Abstract: | A reduction in income tax rates generates substantial dynamic responses within the frame- work of the standard neoclassical growth model. The short-run revenue loss after an in- come tax cut is partly -- or, depending on parameter values, even completely -- offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implica- tions of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate that international trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenue in steady state. |
| Appare nelle tipologie: | 85 - Research reports / Rapporti di Ricerca |
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