Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy

Olivier Cardi and Romain Restout ()

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate the effects of unanticipated and anticipated tax reforms. First, an unanticipated tax reform produces an expansion of GDP, labor, and investment, while an anticipated tax reform has opposite effects before the implementation of the labor tax cut. Quantitatively, if the traded sector is more capital intensive, GDP increases by 1.6 percentage points or declines by 2.8 percentage points after three years, depending on whether the tax cut is unanticipated or anticipated. Second, we find that GDP change masks a wide dispersion in sectoral output responses. Importantly, in all scenarios, a tax reform substantially raises the relative size of the non-traded sector while traded output always drops. Allowing for the markup to depend on the number of competitors, we find that a significant share of GDP change can be attributed to the competition channel while the dispersion of sectoral output responses is amplified. Finally, the workers only benefit from the labor tax cut if the tax change is unanticipated and the traded sector is more capital intensive.

Keywords: Non Traded Goods; Investment; Tax Reform; Anticipation effects. (search for similar items in EconPapers)
JEL-codes: E22 E62 F32 F41 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-acc, nep-dge and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2012-01

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