Taxes, growth and the current account 'tick-curve' effect

Creina Day, Garth Day

    Research output: Contribution to journalArticle

    Abstract

    This paper examines the dynamic and long run effects of a shift from income taxes to consumption taxes in a growing small open economy. We introduce a government sector that maintains a balanced budget and expenditure at a constant proportion of domestic income to a small open economy Swan-Solow model. Our framework provides a previously unidentified dynamic effect that is robust to endogenising the savings rate. Lowering the income tax rate promotes economic growth and has a tick-curve effect on the current account balance, characterised by instantaneous deterioration, a period of recovery and gradual convergence to an improved position in the long run.
    Original languageEnglish
    Pages (from-to)13-27
    JournalAustralian Economic Papers
    Volume49
    Issue number1
    DOIs
    Publication statusPublished - 2010

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