Supply-Side Economics in a Global Economy

Enrique Mendoza and Linda Tesar ()

No 5086, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent quantitative studies predict large welfare gains from reducing tax distortions in a closed economy, despite costly transitional dynamics to more efficient tax systems. This paper examines transitional dynamics and gains of tax reforms for countries in a global economy, and provides numerical solutions for international tax competition games. Tax reforms in a global economy cause cross-country externalities through capital flows in response to consumption-smoothing and debt-servicing effects, with taxes on world payments affecting the distribution of welfare gains. Within the class of time-invariant tax rates, the gains of replacing income taxes with consumption taxes are large and, in the absence of taxes on foreign assets, the monopoly distortion separating cooperative and noncooperative equilibria is negligible. The analysis starts from a benchmark reflecting current G-7 fiscal policies, and considers the effects of tax reforms on real exchange rates and interest differentials. Tax-distorted equilibrium dynamics are computed using a modified version of the King-Plosser-Rebelo algorithm augmented with shooting routines.

JEL-codes: E62 F41 (search for similar items in EconPapers)
Date: 1995-04
Note: IFM PE
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Citations: View citations in EconPapers (19)

Published as (Published as "International Ramifications of Tax Reforms") American Economic Review, Vol. 88, no. 1 (March 1998): 226-245.

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Related works:
Journal Article: The International Ramifications of Tax Reforms: Supply-Side Economics in a Global Economy (1998)
Working Paper: Supply-side economics in a global economy (1995)
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