Strategies for Fiscal Reform in the Context of the Emu: The Case of Portugal

23 Pages Posted: 10 Apr 2004

See all articles by Alfredo M. Pereira

Alfredo M. Pereira

College of William and Mary

Pedro G. Rodrigues

CAPP and ISCSP, Universidade Técnica de Lisboa

Abstract

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.

Suggested Citation

Pereira, Alfredo M. and Rodrigues, Pedro G., Strategies for Fiscal Reform in the Context of the Emu: The Case of Portugal. Review of Development Economics, Vol. 8, pp. 141-163, February 2004. Available at SSRN: https://ssrn.com/abstract=513969

Alfredo M. Pereira (Contact Author)

College of William and Mary ( email )

Williamsburg, VA 23187-8795
United States
757-221-2431 (Phone)
757-221-2390 (Fax)

Pedro G. Rodrigues

CAPP and ISCSP, Universidade Técnica de Lisboa ( email )

Rua Almerindo Lessa
Lisboa, 1300-663
Portugal
+351213619430 (Phone)
+351213619442 (Fax)

HOME PAGE: http://10envolver.wordpress.com

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