Distortionary Taxation and the Debt Laffer Curve
January 1, 1992
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Summary
This paper highlights the importance of the role of the domestic tax system in determining the economic consequences of an external debt overhang. A simple taxation scheme is specified and it is shown that a country can be on the “wrong side” of its debt Laffer curve only if it is on the wrong side of its tax Laffer curve. The analysis indicates that fairly strong, and probably unrealistic, assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overhang are large enough to place a country on the wrong side of its debt Laffer curve.
Subject: Capital outflows, Debt burden, Debt reduction, Tax distortions
Keywords: Laffer curve, WP
Pages:
24
Volume:
1992
DOI:
Issue:
010
Series:
Working Paper No. 1992/010
Stock No:
WPIEA0101992
ISBN:
9781451926545
ISSN:
1018-5941
