TITLE:
Do Consumption Tax Cuts Lead to Dynamic Laffer Effects in Open Economies?
AUTHORS:
Wenchun Wang, Yang Wang, Jiaojiao Wang
KEYWORDS:
Dynamic Laffer Effects, Consumption Tax, New Open Economy Macroeconomics, Nominal Revenue Collection, Real Revenue Collection
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.3,
March
16,
2017
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.