Working papers
Szabolcs Deák, Lionel Fontagné, Marco Maffezzoli, and Massimiliano Marcellino
The recent crisis has emphasized the role of financial - macroeconomic interactions, and international trade in goods and services, in the transmission of the shocks. Both phenomena, closely related to the higher degree of globalization, are very relevant for small open economies, and particularly so when a large share of the economy relies on financial and distribution services. Hence, in this paper we propose to incorporate the banking and distribution sectors into a medium scale DSGE model of a small open economy. As an illustration, the resulting model is then calibrated to match the specific characteristics of the Luxembourg economy, where the financial sector plays a key role. We believe that the results are also of more general interest for studying the reaction of small open economies to real and financial shocks.
Tax evasion under market incompleteness
Marco Maffezzoli
Empirical evidence suggests that the distribution of income and its composition play an important role in explaining tax noncompliance. We address the issue from a macroeconomic point of view, building a dynamic general equilibrium Bewley-Huggett-Aiyagari model that endogenizes tax evasion and income heterogeneity. Our results show that the model can successfully replicate the salient qualitative and quantitative features of U.S. data. In particular, the model replicates the shape of the cross-sectional distribution of misreporting rates over true income levels. Furthermore, we show that a switch from progressive to proportional taxation has important quantitative effects on noncompliance rates and tax revenues.
Keywords: Tax Evasion, Income Heterogeneity, Incomplete markets.
JEL codes: E13, E26, H26
Tax Cuts in Open Economies
Alejandro Cuñat, Szabolcs Deák and Marco Maffezzoli
A reduction in income tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after an income tax cut is partly - or, depending on parameter values, even completely - offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implications of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate that international trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenue in steady state.
JEL Classification: E13, E60, F11, F43, H20
Keywords: international trade, Heckscher-Ohlin, dynamic macroeconomics, taxation, revenue estimation, Laffer Curve
Last updated November 25, 2008
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