Cross-Border Tax Externalities: Are Budget Deficits Too Small?
Willem H. Buiter
Citigroup; European Bank for Reconstruction and Development (EBRD) - Office of the Chief Economist; University of Cambridge - Trinity College; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Birkbeck, University of London; Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. 4164
In a dynamic optimizing model with costly tax collection, a tax cut by one nation creates positive externalities for the rest of the world if initial public debt stocks are positive. By reducing tax collection costs, current tax cuts boost the resources available for current private consumption, lowering the global interest rate. This pecuniary externality benefits other countries because it reduces the tax collection costs for foreign governments of current and future debt service. In the non-cooperative equilibrium, nationalistic governments do not allow for the effect of lower domestic taxes on debt service costs abroad. Taxes are too high and government budget deficits too low compared to the global cooperative equilibrium. Even in the cooperative equilibrium complete tax smoothing is not optimal: current taxes will be lower than future taxes.
Number of Pages in PDF File: 40
JEL Classification: E62, F42, H21working papers series
Date posted: January 14, 2004
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