TITLE:
Tax Base-Broadening a Light at the End of the Tunnel in the Fiscal Consolidation Dynamics
AUTHORS:
Muhammad Ghufran, Jawaria Ashraf, Muhammad Rizwan, Sumran Ali, Luigi Aldieri
KEYWORDS:
Tax Base Broadening, Fiscal Consolidation, Independent Monetary Policy, Bayesian Estimation, Sticky Prices
JOURNAL NAME:
Modern Economy,
Vol.13 No.3,
March
22,
2022
ABSTRACT: It is an open secret that the Global Financial
Crisis (GFC) of 2007-2008 and the COVID-19 pandemic have contributed to the
augmentation of indebtedness worldwide. The World Bank, in its study, Finding
the tipping point: when sovereign debt turns bad, has suggested the
potential role of tax base expansion as a remedial measure of surging
indebtedness (Mehmet et al., 2010). We have employed a DSGE model to observe
the impact of tax base expansion on the output (GDP), and Debt/GDP ratio. The
empirical outlook of the study is based on the framework of independent
monetary policy and the presence of significant public debt in an economy. The
tax base expansion has been attained from the Non-Ricardian household segment;
the reason behind such selection is the unique position, inability to optimize
their utility and lack of access to formal financial components of an economy,
of this segment in any economy. Our findings are aligned with the existing
literature. We found that fiscal consolidation has no immediate impact on both
output and the Debt/GDP ratio. The gradual reduction and increase emerge in the Debt/GDP ratio, and output respectively, which
last at the steady state in the long run. These outcomes endorse the tax base
expansion as a viable option to tackle surging indebtedness and achieving
meaningful fiscal consolidation.