A Tale of Tax Policies in Open Economies

35 Pages Posted: 15 Nov 2016

See all articles by Stéphane Auray

Stéphane Auray

CREST-Ensai

Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Paul Gomme

Concordia University; CIREQ

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Date Written: November 2016

Abstract

To evaluate fiscal policy reforms for Euro‐area countries, this article develops and calibrates a small open economy model. Debt reduction reforms require higher tax rates in the short term in exchange for lower rates in the long term as the debt‐servicing burden falls. Using the capital income tax to implement such a policy leads to welfare gains; the consumption tax, a very small welfare gain; and the labor income tax, a welfare loss. Holding fixed the long‐run debt–output ratio, offsetting a lower capital income tax with either a higher labor income or consumption tax generally yields welfare gains.

Suggested Citation

Auray, Stéphane and Eyquem, Aurélien and Gomme, Paul, A Tale of Tax Policies in Open Economies (November 2016). International Economic Review, Vol. 57, Issue 4, pp. 1299-1333, 2016. Available at SSRN: https://ssrn.com/abstract=2869492 or http://dx.doi.org/10.1111/iere.12199

Stéphane Auray (Contact Author)

CREST-Ensai ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Aurélien Eyquem

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

Paul Gomme

Concordia University ( email )

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Montreal, Quebec H3G 1MB
Canada

CIREQ ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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