On Dynamic Tax Reform with Regime Switching

Wen-ya Chang and Hsueh-fang Tsai
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Wen-ya Chang: Fu-Jen Catholic University, Taiwan
Hsueh-fang Tsai: Fu-Jen Catholic University, Taiwan

Public Finance Review, 2006, vol. 34, issue 3, 306-327

Abstract: This article investigates the effect of tax reform from the viewpoint of regime switching and finds that, following a tax-reform announcement with constant government spending, the key factor determining the adjustment patterns of consumption and capital is the relative extent of the tax-reform-induced “substitution effect†versus the tax-reform-induced “savings-investment effect.†Furthermore, if a rise in government spending is associated with an announcement of tax-financing change, then a crowding-in, a partial crowding-out, or an over-crowding-out effect may be exhibited prior to a government financing change. At the instant of regime switching, consumption exhibits a discontinuous fall to ensure the optimality condition.

Keywords: tax reform; income taxation; consumption taxation; regime switching; investment (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:34:y:2006:i:3:p:306-327

DOI: 10.1177/1091142105284914

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