Tax Austerity: Does it Avert Solvency Crises?

Christos Shiamptanis

LCERPA Working Papers from Laurier Centre for Economic Research and Policy Analysis

Abstract: Many high-debt countries are adopting tax austerity, whereby governments raise their tax rate as the debt level rises with the hope to dispel future solvency crisis. This paper investigates the implications of tax austerity on the likelihood of a solvency crisis. A solvency crisis occurs once adverse shocks push the debt level above its effective debt limit, which is the maximum level of debt that the government can repay. We derive the effective debt limit and show that its position depends on tax austerity. We find that high-debt countries like Italy that undergo tax austerity could lower their effective debt limit and induce a solvency crisis in the near future.

Keywords: Debt limit; Fiscal limit; Austerity; Solvency Crisis; Default (search for similar items in EconPapers)
JEL-codes: E62 F34 H30 H60 (search for similar items in EconPapers)
Pages: 47
Date: 2019, Revised 2021
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http://www.lcerpa.org/public/papers/LCERPA_2019_3.pdf

Related works:
Journal Article: Tax Austerity: Does It Avert Solvency Crises? (2024)
Working Paper: Tax Austerity: Does it avert solvency crises? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:wlu:lcerpa:bm0126

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