Supply-Side Economics in an Integrated World Economy

November 1, 1993

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Linda L. Tesa, and Enrique G. Mendoza Supply-Side Economics in an Integrated World Economy, (USA: International Monetary Fund, 1993) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The macroeconomic effects of changes in tax and expenditure policies are examined in the context of the competitive equilibrium of a two-country, two-sector model of an integrated world economy. Governments finance purchases and net transfers of tradable and nontradable goods by imposing distortionary taxes on factor incomes and consumption. The model is parameterized and calibrated using data from large industrial economies, including estimates of effective tax rates. Numerical simulations provide estimates of the welfare costs associated with existing distortionary taxes and of the potential gains linked to a more efficient use of these taxes. Welfare gains from tax reforms favoring indirect taxation are substantial. The effects of permanent changes in expenditures depend on their sectoral allocation across tradables and nontradables and on whether they are debtor tax-financed. Trade in goods and assets is very sensitive to fiscal policy changes, but aggregate consumption patterns and welfare implications are not.

Subject: Capital income tax, Consumption, Consumption taxes, Expenditure, Fiscal policy, National accounts, Personal income tax, Taxes

Keywords: Aggregate output, Capital income tax, Capital stock, Consumption, Consumption tax, Consumption taxes, Consumption-output ratio rise, Debt convergence, Elasticity consumption change, Europe, Factor income, Income tax, Laffer curve, Output share, Personal income tax, Substitution effect, Trade balance, Welfare gain, World economy, WP

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1993/081
Stock No:

WPIEA0811993
ISBN:

9781451955095
ISSN:

1018-5941

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