Tax Systems Under Fiscal Adjustment: A Dynamic CGE Analysis of the Brazilian Tax Reform
34 Pages Posted: 3 Mar 2006
Date Written: July 2005
This paper uses a dynamic computable general equilibrium model (CGE) to analyze the macroeconomic and redistributive effects of replacing turnover and financial transaction taxes in Brazil by a consumption tax. In order to approximate Brazil`s compliance with its fiscal adjustment targets, the proposed reform is subject to a non increasing path for the level of public debt. Despite an increase in the average consumption tax rate in the first years after the reform, a majority of individuals experienced an increase in their lifetime welfare. This result rejects the hypothesis that the on-going fiscal adjustment effort carried on by the Brazilian government was an obstacle to the implementation of a more efficient tax system.
Keywords: Tax reform, Fiscal adjustment, Computable general equilibrium, Brazil
JEL Classification: C68, E60, H20, H77
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