TAXES, GROWTH AND THE CURRENT ACCOUNT TICK-CURVE EFFECT |
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Authors: | CREINA DAY GARTH DAY |
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Affiliation: | University of Sydney |
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Abstract: | This paper examines the dynamic and long run effects of a shift from income taxes to consumption taxes in a growing small open economy. We introduce a government sector that maintains a balanced budget and expenditure at a constant proportion of domestic income to a small open economy Swan-Solow model. Our framework provides a previously unidentified dynamic effect that is robust to endogenising the savings rate. Lowering the income tax rate promotes economic growth and has a tick-curve effect on the current account balance, characterised by instantaneous deterioration, a period of recovery and gradual convergence to an improved position in the long run. |
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