Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy

Cardi, Olivier and Restout, Romain (2014) Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy. Open Economies Review, 25 (2). pp. 373-406. ISSN 0923-7992

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Abstract

We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate the effects of unanticipated and anticipated tax reforms. First, an unanticipated tax reform produces an expansion of GDP, labor, and investment, while an anticipated tax reform has opposite effects before the implementation of the labor tax cut. Quantitatively, if the traded sector is more capital intensive, GDP increases by 1.6 percentage points or declines by 2.7 percentage points after three years, depending on whether the tax cut is unanticipated or anticipated. Second, we find that GDP change masks a wide dispersion in sectoral output responses. As long as investment is both traded and non traded, a tax reform substantially raises the relative size of the non-traded sector after three years while traded output always drops. Third, a tax reform improves welfare in all scenarios, more so if the markup is endogenous, but less so if the shock is anticipated. Importantly, we find that welfare gains in a two-sector economy with capital accumulation and perfect access to external borrowing are between 39 % and 89 % higher than those in an economy without physical capital.

Item Type:
Journal Article
Journal or Publication Title:
Open Economies Review
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
127363
Deposited By:
Deposited On:
10 Sep 2018 09:06
Refereed?:
Yes
Published?:
Published
Last Modified:
01 Jan 2020 11:30