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Sectoral Effects of Tax Reforms in an Open Economy

Author

Listed:
  • Olivier Cardi

    (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - UP2 - Université Panthéon-Assas - CNRS - Centre National de la Recherche Scientifique, X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Romain Restout

    (UCL IRES - Institut de recherches économiques et sociales - UCL - Université Catholique de Louvain = Catholic University of Louvain)

Abstract
We use a neoclassical open economy model with traded and non traded goods to investigate the sectoral effects of three tax reforms: i) two revenue-neutral shifting the tax burden from labor to consumption taxes and ii) one labor tax restructuring keeping the marginal tax wedge constant. Regardless of its type, a tax reform crowds-in both consumption and investment and raises employment. Whereas tax reforms have a small impact on GDP, they exert substantial effects on sectoral outputs which move in opposite direction in the short-run. The sensitivity analysis reveals that raising the elasticity of labor supply or reducing the tradable content in consumption expenditure amplifies the heterogeneity in sectoral output responses. Finally, allowing for the markup to depend on the number of competitors, we find that a substantial share of sectoral output variations can be attributed to the change in the markup triggered by firm entry.

Suggested Citation

  • Olivier Cardi & Romain Restout, 2010. "Sectoral Effects of Tax Reforms in an Open Economy," Working Papers hal-00544475, HAL.
    • Handle: RePEc:hal:wpaper:hal-00544475
    Note: View the original document on HAL open archive server: https://hal.science/hal-00544475
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    References listed on IDEAS

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    Cited by:

    1. Richard M. Bird & Michael Smart, 2012. "Financing Social Expenditures in Developing Countries: Payroll or Value Added Taxes?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1206, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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    More about this item

    Keywords

    Non Traded Goods; Employment; Current Account; Tax Reform.; Tax Reform;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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