Sectoral Effects of Tax Reforms in an Open Economy

Olivier Cardi (1, 2) , Romain Restout (3)

1 ERMES - Equipe de recherche sur les marches, l'emploi et la simulation
2 X-DEP-ECO - Département d'Économie de l'École Polytechnique
3 UCL IRES - Institut de recherches économiques et sociales

We use a neoclassical open economy model with traded and non traded goods to investigate the sectoral effects of three tax reforms: i) two revenue-neutral shifting the tax burden from labor to consumption taxes and ii) one labor tax restructuring keeping the marginal tax wedge constant. Regardless of its type, a tax reform crowds-in both consumption and investment and raises employment. Whereas tax reforms have a small impact on GDP, they exert substantial effects on sectoral outputs which move in opposite direction in the short-run. The sensitivity analysis reveals that raising the elasticity of labor supply or reducing the tradable content in consumption expenditure amplifies the heterogeneity in sectoral output responses. Finally, allowing for the markup to depend on the number of competitors, we find that a substantial share of sectoral output variations can be attributed to the change in the markup triggered by firm entry.

Mots clés: Non Traded Goods; Employment; Current Account; Tax Reform.; Tax Reform

Domaines: Economies et finances

Olivier Cardi, Romain Restout. Sectoral Effects of Tax Reforms in an Open Economy. 2010. ⟨hal-00544475⟩