Tax Reforms, ""Free Lunches"", and ""Cheap Lunches"" in Open Economies [electronic resource] Tervala, Juha.

Tervala, Juha.
Washington, D.C. : International Monetary Fund, 2008.
IMF eLibrary
IMF Working Papers; Working Paper No. 08/227.
IMF Working Papers; Working Paper No. 08/227
Government document
1 online resource (30 p.)
Local subjects:
Budget balance.
Budget constraint.
Budgetary impact.
Budgetary implications.
Budgetary policy.
Capital accumulation.
Consumption tax.
Consumption taxes.
Cuts in government spending.
Domestic tax.
Domestic tax reform.
Economic models.
Effective tax rates.
Expansionary fiscal.
Expansionary fiscal policy.
Fiscal expansion.
Fiscal package.
Fiscal policy.
Fiscal policy coordination.
Fiscal stance.
Fiscal stimulus.
Fiscal stimulus package.
Fiscal strategies.
Flat tax.
Flat tax reforms.
Flat taxes.
Foreign tax.
Foreign tax rate.
Government budget.
Government budget constraint.
Government spending.
Higher income.
Higher tax revenues.
Income tax cuts.
Income tax rates.
Income taxes.
Increase in consumption.
Public spending.
Real tax revenues.
Reduction in public spending.
Reduction in tax.
Reduction in transfers.
Revenue collection.
Tax burden.
Tax changes.
Tax collection.
Tax competition.
Tax cut.
Tax cuts.
Tax increase.
Tax legislation.
Tax policy.
Tax rate changes.
Tax rate reduction.
Tax rate reductions.
Tax rates.
Tax reduction.
Tax reductions.
Tax reform.
Tax reforms.
Tax revenue.
Tax revenues.
Total tax collection.
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 81⁄2-24 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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Ganelli, Giovanni.
Tervala, Juha.
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