Showing papers on "Consumption tax published in 2021"

The Macroeconomic Effects of Income and Consumption Tax Changes

Abstract: Do consumption and income tax changes affect the economy differently? We answer this question by estimating structural VARs, where we proxy the latent tax shocks with a newly constructed narrative account of income and consumption tax liability changes in the United Kingdom. We find that income tax shocks have large short run effects on GDP, private consumption and investment. The implied income tax present-value multiplier is around 2.7. The effects of consumption tax cuts are modest and not statistically different from zero on GDP and investment and only marginally expansionary on private consumption. These results indicate that i) it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy, and ii) consistent with conventional public finance theories, consumption taxes are less distortive than income taxes.

An Assessment of Abenomics: Evolution and Achievements

Abstract: This paper evaluates the first two arrows of Abenomics. The first arrow, aggressive monetary policy, was successful in lifting the Japanese economy out of deflation, although the 2% inflation target was not achieved. The real economy and financial markets recovered strongly. Unconventional monetary policy was successful through the channels of the yen and stock prices. The second arrow, “flexible” fiscal policy, can be interpreted as an enhanced counter‐cyclical policy, that is, to stimulate when needed, but tighten when possible. The first fiscal supplementary budget of February 2013 was a powerful boost to the economy. For fiscal consolidation, the consumption tax rate was hiked from 5% to 10% in two installments in April 2014 and October 2019. This helped to shrink the deficits. With strong macroeconomic performances, Shinzo Abe established a record as the longest‐serving prime minister in Japanese history.

An Evolutionary Game Model for Understanding Fraud in Consumption Taxes [Research Frontier]

Abstract: This paper presents a computational evolutionary game model to study and understand fraud dynamics in the consumption tax system. Players are cooperators if they correctly declare their value added tax (VAT), and are defectors otherwise. Each player's payoff is influenced by the amount evaded and the subjective probability of being inspected by tax authorities. Since transactions between companies must be declared by both the buyer and seller, a strategy adopted by one influences the other?s payoff. We study the model with a wellmixed population and different scalefree networks. Model parameters were calibrated using real-world data of VAT declarations by businesses registered in the Canary Islands region of Spain. We analyzed several scenarios of audit probabilities for high and low transactions and their prevalence in the population, as well as social rewards and penalties to find the most efficient policy to increase the proportion of cooperators. Two major insights were found. First, increasing the subjective audit probability for low transactions is more efficient than increasing this probability for high transactions. Second, favoring social rewards for cooperators or alternative penalties for defectors can be effective policies, but their success depends on the distribution of the audit probability for low and high transactions.

Smart hedging against carbon leakage

Abstract: Unilateral climate policy induces carbon leakage through the relocation of emission-intensive and trade-exposed industries to regions with no or more lenient emission regulation Both analytical and numerical studies suggest that emission pricing combined with border carbon adjustment is a secondbest instrument, and more cost-effective than output-based rebating, in which case domestic output is indirectly subsidized No country has so far imposed border carbon adjustment, while variants of output-based rebating have been implemented In this paper we show that combining output-based rebating for emission-intensive and trade-exposed goods with a consumption tax on the same goods can be equivalent with border carbon adjustment Moreover, we demonstrate that it is welfare improving for a region which has already implemented emission pricing along with output-based rebating to also introduce such a consumption tax We conclude that supplementing output-based rebating with a consumption tax constitutes smart hedging against carbon leakage: Compared to output-based rebating stand-alone it constitutes a robust strategy for improving cost-effectiveness of unilateral climate policy; compared to border carbon adjustment it limits the risks of potentially detrimental trade disputes

Implications of the Slowdown in Trend Growth for Fiscal Policy in a Small Open Economy

Abstract: We set up and estimate a small open economy model with fiscal policy in which trend growth can permanently change The magnitude and timing of the change in trend growth are estimated alongside the structural and fiscal policy rule parameters Around 2003:Q3, trend growth in per capita output is estimated to have fallen from just over 2 per cent to 06 per cent annually The slowdown brings about a lasting transition which in the short-run decreases consumption tax revenues but increases them in the long-run changing permanently the composition of tax revenues and temporarily increasing the government debt-to-output ratio

Optimal fiscal policy in a model with search-and-matching frictions: the case of Bulgaria (1999–2018)

Abstract: This paper explores the effects of fiscal policy in an economy with search and matching frictions. To this end, a dynamic general-equilibrium model with government sector is calibrated to Bulgarian data (1999–2018). Two regimes are compared and contrasted – the exogenous (observed) vs. optimal policy (Ramsey) case. The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of utility-enhancing public services. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility-enhancing public services, which are now three times lower; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.3%, slightly lower than the rate in the exogenous policy case.

Tax competition in the presence of environmental spillovers

Abstract: This paper examines the efficiency of destination-and origin-based consumption taxes, in the presence of consumption generated perfect cross-border pollution spillovers, when tax revenue either finances public pollution abatement or it is lump-sum distributed. When consumption tax revenue finances the provision of public pollution abatement and regions have identical and quasi-linear preferences then, the non-cooperative equilibrium origin-based consumption taxes are efficient, while the destination-based consumption taxes are inefficiently low. When, however, consumption tax revenue is lump-sum distributed, then, the destination-based tax principle leads to inefficiently low taxes, while the origin-based tax principle leads either to inefficiently high or low taxes.

Stamping out stamp duty: property or consumption taxes?

Abstract: Property transaction taxes - also known as stamp duty - are widely viewed as an inefficient form of taxation. In this paper, we examine the welfare implications of removing stamp duty in a general equilibrium overlapping generation model with heterogeneous agents. Our model features an idiosyncratic shock to housing preferences which may create mismatch or induce household to move. When examining steady states we find that newborn households prefer entering an economy with a recurring property tax rather than one with stamp duty. In contrast, when examining transition dynamics we find that existing households prefer replacing stamp duty with a consumption tax.

Fiscal adjustments and the shadow economy in an emerging market

Abstract: We build an open-economy dynamic stochastic general equilibrium (DSGE) model that allows us to: (i) derive a time series for labor informality in Brazil spanning the period 2004–2018, whose evolution is consistent with the behavior of the main series provided by Pesquisa Nacional por Amostra de Domicilios (PNAD); (ii) run dynamic simulations showing that, in the presence of a large informal labor market (around 50% of the total labor force), expenditure-cutting measures lead, at worst, to mild short-run recessions in the formal sector and are likely to foster public debt sustainability. Likewise, adjustments through some kinds of distortionary taxation, mainly the corporate tax, and to a lesser extent, the consumption tax, also seem to improve both public debt dynamics and fiscal collection without a significant cost in terms of output. Thus, in countries with large informal economies experiencing fiscal woes, expenditure-based consolidations, as well as some sorts of tax-based adjustments, should be relied upon.

Consumption and hours between the United States and France

Abstract: We document large differences between the United States and France in allocations of consumption expenditures and time by age. Using a life-cycle model, we quantify to what extent tax and transfer programs and market and home productivity can account for the differences. We find that while labor efficiency by age and home-production productivity are crucial in accounting for the differences in the allocation of time, the consumption tax and social security are more important regarding allocation of expenditures. Adopting the U.S. consumption tax decreases welfare in France, and adopting the U.S. social security system increases welfare in France.

Market Mechanisms for Reducing Emissions and the Introduction of a Flexible Consumption Tax

Abstract: Since its founding institutions the European Economic Community and Eratom, the European Union has paid great attention to energy issues. However, its powers have been updated in relatively recent times. Similarly, the EU has promoted in the post-Kyoto Protocol environmental issues with a leading by example approach and implementing an ambitious plan to decarbonize the economy with the energy transition and emission limitation through a market instrument, the emission trading system. The European emissions trading system has been the most ambitious management of negative externalities related to GHG set-up at the international level. The EU now considers that the costs of ecological industrial transition could limit the ability of European industries to compete in the globalized market with industries not subject to similar limits and costs. The EU intends to adopt a carbon adjustment tax at the border, to limit the phenomenon of reallocation and compensate for environmental costs. This paper analyses the various proposals and their advantages and disadvantages. The focus is on the charge on emissions mechanism, which is one of the three proposals the European Economic and Social Committee suggested to the European Commission for further investigation in view of the current competitive asymmetry now recognized by the EU Commission itself. The charge on emissions would value industrial emissions directly within the VAT and use the blockchain to track the emissive supply chain of products.

Economy-wide impact of tax reform in Ethiopia: A recursive dynamic general equilibrium model

Abstract: This paper examined the macroeconomic influence of tax reform on the Ethiopian economy using the Dynamic Computable General Equilibrium model. It utilized the updated 2009/2010 Ethiopian Social Accounting Matrix (SAM) from 2005/2006 developed by Ethiopian Development Research Institute (EDRI). To investigate the impact of tax reform on the Ethiopian economy, different simulations were made turn by turn. First, a reduction in direct tax by 30% is introduced to see the impacts of direct tax reduction on the economy. As a result, macroeconomic variables such as GDP, absorption, private consumption, government expenditure, import, export, government income, investment, and aggregate output show a considerable improvement. Additionally, there is an increase in factor income and welfare gain for households though the factor supply of labor and land is fixed compared to base case scenarios. On the second simulation, an increase in sales tax by 67% was introduced to examine at the impact of sales tax on the economy. Thus, increases in sales tax improve the overall economic performance compared to direct reduction. However, under the third simulation decrease in import tariff by 24% worsened the general economic performance by encouraging import and depressing domestic output. Based on the finding, encouraging consumption tax reform, protecting the home country from external sector influence to encourage domestic production is the major policy option recommended to bring a good economic performance with lower distortion since we cannot abolish distortion when we conduct tax reform. Key words: Ethiopia, tax reform, tax revenue, macroeconomics performance, dynamic computable general equilibrium.

Local Government Tax Structure

Abstract: Designing the system of local funding implies the allocation of different tax sources to local governments. This challenge is of particular interest in times of economic recession since tax revenues can stabilise local revenues and therefore limit the need of fiscal regulation. International organisations promote a shift from labour taxes towards less growth-deteriorating consumption taxes. The recommendations for local governments aim at an increase of property taxation, which yields rather stable revenues over the business cycle. At first glance, this advice seems to describe a path of optimisation, minimising adverse economic effects and providing local governments with more reliable revenues. From this starting point, we analyse local tax structures across Europe with Eurostat data from 2004 to 2018. This study reveals that in times of economic slowdown, the share of potentially more growth-deteriorating local income tax revenue increased relative to the share of consumption tax revenue. Moreover, revenue from the current local tax basket is quite dependent on cyclical variations. Both imply that there is room for improving local government tax structures. However, although there are criteria for an optimal local tax structure, revenues should match the set of public services. As local governments provide quite heterogeneous sets, there is no one-size-fits-all solution.

Progressive consumption tax and monetary policy in an endogenous growth model

Abstract: This paper analyzes the impact of the interaction between monetary policy and fiscal policy on the stability of an one-sector AK economy. The monetary authority pegs the money growth factor while the fiscal authority implements a progressive consumption tax. The demand of money is motivated by a fractional liquidity constraint on consumption expenditures. When only the monetary authority operates, the unique steady state is locally indeterminate if the intertemporal elasticity of substitution in consumption is low enough. When the fiscal authority is introduced, the interaction of fiscal policy and monetary policy modifies significantly the stability properties. In particular, the fiscal authority could either stabilize or destabilize the economy depending on the tax progressivity, the strength of the liquidity constraint and the intertemporal elasticity of substitution. Our numerical examples further verify those theoretical results.

Wayfair in Constitutional Perspective: Who Sets the Ground Rules of US Fiscal Federalism?

Abstract: The 2018 US Supreme Court decision in South Dakota v. Wayfair is arguably the court’s most consequential state tax decision in a generation, perhaps longer. The Wayfair decision overturned the Supr...

Effects of fiscal and monetary policy uncertainty on economic activity in South Africa

Abstract: The paper examines the effect of fiscal and monetary policies on economic activities in South Africa while attempting to identify the role of uncertainty. The paper uses quarterly time series data using the variables of income tax, consumption tax, capital tax, and government expenditure to measure fiscal policy uncertainty while interest and inflation rate variables were used to measure monetary policy uncertainty. Also, real gross domestic product, real consumption, real investment, and employment were used to measure economic activities. The partial least squares structural equation model (PLS-SEM) was used for analysis and result presented for measurement and structural models. Results revealed the existence of policy uncertainty in the South African economy which tends to reduce the level of economic activity as uncertainty increases. This result informs of the need for policy makers to minimally reduce uncertainties for both fiscal and monetary policies for the economy to improve.

The Pass-Through of Temporary VAT Rate Cuts: Evidence from German Supermarket Retail

Abstract: On 3 June 2020, the German government announced a temporary value added tax (VAT) rate reduction. VAT rates were reduced on 1 July 2020 and went back to their previous level on 1 January 2021. We study the price effects of the temporary VAT rate reduction using a web-scraped data set covering the daily prices of roughly 130,000 supermarket products. To identify the causal price effects, we compare the development of prices in Germany to those in Austria. Our findings indicate an asymmetric price response to the VAT rate cut and subsequent increase. The reduction of VAT rates led to a price decrease of roughly 1.3%, implying that about 70% of the tax cut were passed on to consumers. In contrast, the price effect of the VAT increase was only about half that size. We also study the link between tax incidence and the intensity of competition. Pass-through of the VAT reduction was higher in product groups with a large number of competing products. We rationalize this finding by analyzing consumption tax incidence in the ‘love of variety’ model of consumption.

Impact of changes in the labor force and innovative agro-based food industry clusters on primary and food–beverage industries, and regional economies in Japan’s depopulating society

Abstract: Demographic changes such as a decline in the labor force population and increase in an elderly population in Japan since 2000 have not been uniform across regions. These population dynamics restrain regional Japanese industries and impede the growth of regional economies. The period from 2005 to 2030 can be divided into two periods according to the degree of depopulation: mild depopulation period (2005–2015) and rapid depopulation period (2015–2030). This demographic change has a significant impact on primary and food–beverage industries. The domestic supply of primary and food–beverage industries under mild depopulation declined from 2000 until 2015. Therefore, in this paper, we evaluate the impacts of the decline in labor force, domestic market, and total-factor productivity (TFP) on primary and food–beverage industries, and regional economies during these periods. As a countermeasure to the rapid decline in population and TFP for 2015–2030, policies for demand-side consumption tax reduction and supply-side innovative agro-based food industry clusters were proposed, and their economic effects empirically analyzed using the four-region computable general equilibrium (4SCGE) model. We found that the long-term sustainable economic development of primary and food–beverage industries, and regional economies under rapid depopulation requires a demand-side consumption tax reduction policy to stimulate short-term domestic demand as well as a supply-side innovative agro-based food industry cluster policy to expand long-term domestic production.

Determinants and Sustainability of Manufacturing Sector Performance in Nigeria: The Roles of Selected Macroeconomic Variables

Abstract: Manufacturing sector is a vibrant sector that spurs growth in every other sector of the economy. Despite this, macroeconomic environment in the country has not made this desire materialized. Therefore, the study examined the determinants and sustainability of manufacturing sector performance in Nigeria from 1994-2019. The data used include manufacturing sector output, interest rate, real exchange rate, tax rate, money supply and trade openness. Also, Error Correction Model (ECM) and Pairwise Granger Causality(PGC) techniques were used for the formulated objective. The unit root test confirmed stationarity of interest rate at level; while other were integrated of order one (D = 1). The Johansen co-integration established a long-run relationships. The ECM corrected the disequilibrium at an annual rate of 77.5%. Also, real exchange rate, tax rate and trade openness had a direct and significant effect on manufacturing sector output. While, interest rate and money supply were non-significance. The PGC result revealed a bi-directional causality between real exchange rate and manufacturing sector and tax rate and manufacturing sector output. It was concluded that increase in consumption tax, real exchange rate and liberation of the economy were the determinants of manufacturing sector performance, while appreciation of nigeria’s currency (naira) and increase in tax rate with proportional improvement in infrastructural facilities are needed to sustain it. Therefore, recommended that the financial institutions especially the apex bank should eliminate different bench-mark of exchange rate policy by allowing the market force of demand and supply to depict the real value of naira.

Time‐varying consumption tax, productive government spending, and aggregate instability.

Abstract: In this paper we investigate if government balanced‐budget rules together with endogenous taxation may lead to aggregate instability in an endogenous growth framework. After highlighting the differences with the exogenous growth framework, we prove that under counter‐cyclical consumption taxes, while there exists a unique balanced growth path, sunspot equilibria based on self‐fulfilling expectations occur through a form of global indeterminacy. In addition, we argue that this result is empirically plausible for a large set of OECD countries and that it may also emerge with endogenous income taxes.

Analysing the macroeconomic impact of GST implementation for Malaysian economy: Evidence of CGE model

Abstract: Goods and Services Tax (GST) is a general consumption tax imposed on goods and services. In the face of an increasingly challenging economic performance, the government’s deteriorating revenue and stagnant investment levels have resulted in a deficit. Besides reliance on oil and gas revenue, Malaysian therefore has implemented GST at 6 per cent in April 2015. In this paper, we use a generally equilibrium model (CGE) to examine the wider macroeconomic impact on this GST policy. We found that while GST increased government revenue and brings about 2 per cent increase in real Growth Domestic Product (GDP), it manages to handle investment levels. Additionally, GST leads to increase the fixed investment and in real consumption and the welfare through declining of consumer price index by 0.2 per cent. As GST is excluded from exports of domestically manufactured products, the impact of six per cent of GST is increased by the export of goods and services produced domestically. On the other hand, a decline in real production is inevitable, provided a decrease in personal disposable earnings, real investment and consumption, the food and beverages and accommodation sector will see the greatest decrease in production by -0.34 per cent and the information and communication 0.24 per cent. While the import impact of GST, we can see the percentage of changes are slightly small rather than export. This statement coincides with the results found showing that imports are exceeding the exports. In this highlight, the ideas on the implementation of GST is to upgrade the government tax collecting mechanism and beneficially to contribute to national GDP.

Macroeconomic Implications of Covid-19 Pandemic in Morocco

Abstract: The aim of this paper is to study the effects of the Covid-19 Pandemic in Morocco and subsequent responses on the economy using in a linear DSGE model. The analysis takes into account internal and external shocks and a high level of unemployment since the pandemic crisis affects a priori some contact-intensive sectors but do widen to other sectors via general equilibrium, inducing a job loss worrying situation and subsequently a great recession. I use DSGE model with an open economy, nominal rigidities in prices and five types of agents (households, producers, retailers, monetary authority and fiscal authority). I calibrated the model using Bayesian techniques and data covering the period 1998Q1 – 2019Q2. Results indicate a lasting effect shock for at least 12 quarters after the impact. Higher public debt is an obvious result of all the shocks except for the consumption tax shock. Results indicates also a significant decline in GDP following external shocks, monetary policy shock, labor tax shock, capital tax shock and technology shock. The consumption tax shock has unlike the others a very small negative impact on GDP followed by an increase in GDP. For the government expenditure and investment shock, GDP eventually decreases after increasing on impact. The inflation shock has a surprisingly a positive impact on GDP followed by a negative one four quarters after the shock.

Fiscal shocks and spillovers in a dynamic two-country model

Abstract: This paper examines the cross-border effects of domestic fiscal shocks on foreign economic activities by constructing a two-country general equilibrium model. The model yields two main results by comparing four alternative fiscal shocks: government spending, the capital income tax rate, the labor income tax rate, and the consumption tax rate. First, domestic fiscal shocks can generate sizable spillovers abroad. Second, once the size of each fiscal shock is normalized to achieve an equal change in government revenue, the spillover effects of different fiscal shocks on the foreign economic variables are qualitatively similar.

Evaluation of the Increased Share of Tax Revenues from Government Revenues Using the Approach of Oil Dependency Reduction

Abstract: This quantitative research was conducted with a positivist paradigm to evaluate the methods that could increase tax revenues from government revenues using oil dependency reduction. The researcher used the annual data of Iran during 1978-2019 to analyze the research model. In addition, a generalized torque technique was applied in the EViews software to estimate the model. According to the results, the variable of oil revenues had the most significant effect on the government revenues, followed by the revenue of sales and consumption tax and value-added tax (VAT), indicating that the government could easily reduce oil revenues by efficient policies and replace this source of income with the revenue from sales and consumption tax and VAT. On the other hand, the revenue from wealth tax had the least significant impact on the government revenues, which was possibly caused by the inefficiency of reception methods or the inability to be identified. Further assessment in this regard could help governments identify extremely more appropriate revenue resources to extract less oil and control social inequity. An important issue observed in this study was the reverse coefficient of the revenue from corporate tax. Most of these companies may be manufacturing and industrial units, and given the pressure of economic and political issues and inflation on the country, they have mostly reacted to enormous taxes, had tax evasion, or reduced their production level, which has, in turn, increased the rate of unemployment and decreased the national gross domestic product, thereby reducing the government revenues.