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Taxes, Growth And The Current Account Tick‐Curve Effect

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  • CREINA DAY
  • GARTH DAY
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.

Suggested Citation

  • Creina Day & Garth Day, 2010. "Taxes, Growth And The Current Account Tick‐Curve Effect," Australian Economic Papers, Wiley Blackwell, vol. 49(1), pages 13-27, March.
    • Handle: RePEc:bla:ausecp:v:49:y:2010:i:1:p:13-27
    DOI: 10.1111/j.1467-8454.2010.00384.x
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    References listed on IDEAS

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