TAXES, GROWTH AND THE CURRENT ACCOUNT TICK‐CURVE EFFECT

Creina Day and Garth Day

Australian Economic Papers, 2010, vol. 49, issue 1, 13-27

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.

Date: 2010
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https://doi.org/10.1111/j.1467-8454.2010.00384.x

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