Tax reform on the brink of fiscal dominance: a political economy model

Rogério Ladeira Furquim Werneck ()
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Rogério Ladeira Furquim Werneck: Department of Economics PUC-Rio

No 505, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: With an overindebted public-sector, Brazil has been on the brink of a fiscal dominance problem for quite a long time. The term has been usually associated to a situation in which monetary policy becomes subordinated to fiscal needs. This paper calls attention to broader implications of prolonged exposure to impending fiscal dominance. A highdebt environment may make perfectly reasonable fiscal-reform initiatives seem extremely risky. Without any room to absorb revenue losses, in a complex fiscalfederalism arrangement, the government is bound to recurrently see badly needed tax reform, which could lead to a much less distorting tax system, as an unaffordable adventure. The paper is structured in the following way. The next section presents stylized facts that have been underlying a whole decade of unsuccessful tax-reform attempts in Brazil. Section 3 shows how the combination of those facts creates very unfavorable conditions for the approval of the kind of tax reform the country needs. A simple political economy model is developed in section 4. Simulations based on the model are analyzed in sections 5 and 6. Concluding remarks are presented in the last section.

Keywords: tax reform; public debt; fiscal dominance; political economy; federalism; Brazil (search for similar items in EconPapers)
JEL-codes: E62 H20 H6 H77 (search for similar items in EconPapers)
Pages: 18p
Date: 2005-08
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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