Do Consumption Tax Cuts Lead to Dynamic Laffer Effects in Open Economies? - Theoretical Economics Letters

TEL > Vol.7 No.3, April 2017

Do Consumption Tax Cuts Lead to Dynamic Laffer Effects in Open Economies? ()

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Download as PDF (Size: 408KB) PP. 324-338

DOI: 10.4236/tel.2017.73025 1,820 Downloads 2,984 Views

Author(s)

Wenchun Wang¹, Yang Wang¹, Jiaojiao Wang²

Affiliation(s)

¹Financial Research Center, Fudan University, Shanghai, China.
²School of Economics, Fudan University, Shanghai, China.

ABSTRACT

This paper extends benchmark OR model with consumption tax reform, based on “New open economy macroeconomics” framework, and analyzes responses of consumption tax reduction to output, consumption, exchange rate. Our analytical results show that a unilateral cut in consumption tax rate for domestic country results in a domestic depreciation, generates a domestic boom in which both output and consumption increase in the short-run and long-run. We focus on the dynamic Laffer effects to happen by numerical solutions from our derived analytical solutions, in the sense that it has positive budgetary consequences for the country which implements it. So both government and residents can get benefits from a consumption tax cut.

KEYWORDS

Dynamic Laffer Effects, Consumption Tax, New Open Economy Macroeconomics, Nominal Revenue Collection, Real Revenue Collection

Share and Cite:

Wang, W. , Wang, Y. and Wang, J. (2017) Do Consumption Tax Cuts Lead to Dynamic Laffer Effects in Open Economies?. Theoretical Economics Letters, 7, 324-338. doi: 10.4236/tel.2017.73025.

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