Baltic Tax Reform

Helmuts Azacis and Max Gillman

No E2008/6, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: The paper presents an endogenous growth economy with a representation of the tax rate system in the Baltic countries. Assuming that government spending is a given fraction of output, the paper shows how a flat tax system balanced between labor and corporate tax rates can be second best optimal. It then computes how actual Baltic tax reforms from 2000 to 2007 affect the growth rate and welfare, including transition dynamics. Comparing the actual reform effects to hypothetical tax experiments, it results that equal flat tax rates on personal and corporate income would have increased welfare in all three Baltic countries by 24% more on average than the actual reforms. This shows how equal, balanced, flat rate taxes can be optimal in both theory and practice. Further, movement towards a more equal balance between labor and capital tax rates, through changing just one tax rate, achieved almost as high or higher utility gains as in actual law for all three countries under both open and closed economy cases. This shows benefits of moving towards the optimum.

Keywords: tax reforms; endogenous growth; transitional dynamics; flat taxes (search for similar items in EconPapers)
JEL-codes: E13 H20 O11 O14 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2008-02, Revised 2008-10
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-tra
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Forthcoming in Journal of Macroeconomics

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Related works:
Journal Article: Flat tax reform: The Baltics 2000-2007 (2010)
Working Paper: Flat Tax Reform.The Baltics 2000 – 2007 (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cdf:wpaper:2008/6

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