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Does Nonlinear Taxation Stabilize Small Open Economies?

Been-Lon Chen (), Yunfang Hu () and Kazuo Mino ()
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Yunfang Hu: Graduate School of Economics, Kobe University
Kazuo Mino: Faculty of Economics, Doshisha University

No 997, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper examines the stabilization effect of income taxation rules in small open economies. We show that if endogenous growth is not allowed, belief-driven fl?uctuation will not emerge, but the economy displays total instability under certain conditions and nonlinear income tax may recover saddle point stability. If endogenous growth is possible and if the taxation rule specifi?es the rate of income tax held in the balanced growth equi- librium, then equilibrium indeterminacy will not arise either. However, if the long run tax rate is not predetermined, then, equilibrium path of the economy may be indeterminate, and an appropriate taxation rule can establish determinacy.

Keywords: Taxation Rule; Indeterminacy; Small Open Economy; Endogenous Growth (search for similar items in EconPapers)
JEL-codes: E62 O41 (search for similar items in EconPapers)
Pages: 35pages
Date: 2018-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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