Trade Structure and Growth Effects of Taxation in a Two-Country World

41 Pages Posted: 23 Jul 2014

See all articles by Daisuke Amano

Daisuke Amano

Otaru University of Commerce

Jun-ichi Itaya

Hokkaido University - Division of Modern Economics and Management

Kazuo Mino

Kyoto University - Institute of Economic Research

Date Written: July 22, 2014

Abstract

This paper explores the long-run impacts of tax policy in a two-country model of endogenous growth with variable labor supply. We focus on international spillover effects of tax reforms under alternative trade structures. It is shown that if the instantaneous utility function of the representative family in each country is additively separable and if international capital mobility is absent, then a change in taxation in one country does not directly affect capital formation in the other country. Such a conclusion is fundamentally modified if international borrowing and lending are allowed. Due to free financial flows, a change in tax policy in one country directly diffuses to the growth performance of the other country, even though preference structures are assumed to be log-additive forms.

Keywords: factor-income tax, consumption tax, equilibrium dynamics, two-country model, endogenous growth, variable labor supply

JEL Classification: F43, O41

Suggested Citation

Amano, Daisuke and Itaya, Jun-ichi and Mino, Kazuo, Trade Structure and Growth Effects of Taxation in a Two-Country World (July 22, 2014). CESifo Working Paper Series No. 4882. Available at SSRN: https://ssrn.com/abstract=2469768

Daisuke Amano

Otaru University of Commerce ( email )

3-5-21 Midori
Otaru-shi, Hokkaido 047-8501
United States

Jun-ichi Itaya

Hokkaido University - Division of Modern Economics and Management ( email )

Sapporo 060-0809
Japan

Kazuo Mino (Contact Author)

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
JAPAN

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