Intro -- Contents -- I. Introduction -- II. The Model -- A. Households -- B. The Government -- C. Firms -- D. The Initial Steady State -- III. Parameterization -- IV. The Domestic and International Effects of a Cut in the Income Tax Rate -- A. The Impact on the Domestic Economy -- B. The International Effects -- V. Consumption Tax Cuts -- VI. A Revenue Neutral Tax Reform -- VII. Sensitivity Analysis -- VII. Conclusions -- Appendix -- References.

This paper focuses on the macroeconomic and budgetary impact of tax reforms in a New Keynesian two-country model. Our results show that both income and consumption unilateral tax rate reductions do not constitute a "free lunch", in the sense that they have negative budgetary consequences for the country which implements them. In addition, the degree of self-financing implied by our model is in the 8½-24 percent range. Since the degree of self-financing estimated in previous literature was larger, we conclude that in our model not only the "lunch" is not "free", but is also not that "cheap". A comparison of alternative (income-tax versus consumption-tax based) fiscal stimulus packages shows that consumption tax cuts imply a larger short-run impact on domestic output but the income tax cuts stimulate the domestic economy more in the long run. We also look at the implications of a revenue-neutral tax reform in which consumption taxes are increased to compensate for lower income tax collection.

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Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2018. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.