The Design of Fiscal Reform Packages: Insights from a Theoretical Endogenous Growth Model

July 22, 2016

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Format: Chicago

Andrew Hodge. The Design of Fiscal Reform Packages: Insights from a Theoretical Endogenous Growth Model, (USA: International Monetary Fund, 2016) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies the impact on growth, welfare, and government debt of fiscal reform packages in a theoretical model drawing together three key features of the endogenous growth literature: (i) investment in technology (in the form of human capital) offsets diminishing marginal productivity of private capital, allowing for perpetual growth in output per capita; (ii) changes in investment behavior because of cuts to distortionary tax rates impact long-run growth; and (iii) public capital has a role influencing total factor productivity and growth. A quantitative simulation using reasonable parameter values suggests that modest capital and/or labor income tax cuts and public investment increases have significant positive effects on consumer welfare but small effects on per capita income growth, where fiscal costs are offset by reductions in unproductive government spending. Capital income tax cuts and public investment increases continue to boost welfare when offset by consumption tax rises (rather than spending cuts), although the welfare benefits of modest labor income tax cuts are outweighed by the costs of a compensating consumption tax increase.

Subject: Capital income tax, Expenditure, Fiscal policy, Human capital, Labor, Personal income tax, Public investment spending, Taxes

Keywords: Capital income tax, Capital share, Constant returns to scale, Consumer welfare, Endogenous growth, Fiscal policy, Human capital, Personal income tax, Physical capital, Physical capital goods, Private physical capital, Public capital, Public investment spending, Reform BGP, WP

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/146
Stock No:

WPIEA2016146
ISBN:

9781498382199
ISSN:

1018-5941

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